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THE  COST  OF  PRODUCTION 


THE  PRINCIPLES  OF  THE  SCIENCE  OF 
COSTS,  WITH  ILLUSTRATIVE  EXAM- 
PLES BY  COST  EXPERTS  FOR  VARIOUS 
LINES  OF  MANUFACTURING  INDUSTRY 


CoHeded  and  Edited  by 

B.  C.  BEAN,  M.  E.,  LL.  B. 


or  rnc   r 


Vfuvt*mr 


or 


*SlL^o«N^ 


ENLARGED  EDITION 


THE  SYSTEM  COMPANY 

CHICAGO-NEW  YORK 

1905 


Copyright,  1905,  by 
The  System  Company 


rf&V 


]1 


PEEFACE 

The  development  of  manufacturing  and  the  inter- 
ests closely  related  to  it  has  seen  a  corresponding 
growth  in  the  science  of  costs.  Nowhere  has  the  appli- 
cation of  scientific  methods  to  the  productive  end  of  a 
business  yielded  larger  returns  than  here.  The  pro- 
ductive sciences  are  so  closely  and  intimately  related  to 
cost  reduction  that  increased  production  calls  for  and 
demands  with  increase  in  volume  of  a  product  a  corre- 
sponding decrease  in  its  cost. 

The  reasons  for  this  demand  are  manifold.  They 
are  at  the  same  time  empirical  and  scientific.  Empiri- 
cism arbitrarily  demands  reduced  cost.  Scientific  meth- 
ods show  how  cost  reduction  can  be  effected. 

Contrary  to  general  opinion,  there  is  considerable 
literature  extant  on  the  science  of  costs.  Several  works 
treat  the  subject  from  their  individual  standpoints; 
many  papers  of  great  merit  have  been  presented 
before  various  engineering,  auditing,  and  bookkeeping 
societies,  and  the  technical  press — ever  to  the  fore  in 
disseminating  valuable  information — has  been,  perhaps, 

iii 


iv  PREFACE 

the  most  important  medium  of  all  for  furthering  the 
work. 

All  literature  on  this  important  subject  seems  to 
have  been  included  in  either  of  two  classes:  either  an 
exposition  of  a  working  system  or  systems,  or  an  un- 
related set  of  statements  concerning  the  science.  In 
this  work  an  attempt  has  been  made  to  give  an  exposi- 
tion of  the  science  from  a  broad  standpoint  applicable 
to  any  business;  to  arrange  the  elements  in  logical 
order,  giving  due  weight  to  proper  authorities ;  to  unify 
and  blend  the  whole  so  as  to  furnish  true  information  to 
the  student  of  the  science  and  at  the  same  time  not  be 
too  elementary  for  the  experienced  cost  expert.  Finally, 
a  number  of  cost  systems  with  forms  have  been  added, 
as  operated  by  various  experts  in  this  particular  line, 
with  the  idea  of  making  a  work  of  real  worth  to  those 
wishing  exact  information  on  this  subject. 

Careful  search  has  been  made  of  all  the  available 
literature  on  the  subject,  a  large  number  of  manufac- 
turing plants  have  been  investigated  and  numerous  per- 
sonal interviews  have  been  had  with  those  conversant 
with  the  subject  of  costs  in  order  to  secure  the  informa- 
tion necessary  for  a  work  of  this  character. 

It  is  hoped  that  the  information  here  set  forth  will 


PREFACE  r 

be  found  of  service  and  add  its  required  quota  to  the 
upbuilding  of  the  business  sciences,  at  the  same  time 
maintaining  the  high  standard  set  by  the  preceding 
volumes  of  the  Business  Man's  library,  of  which  this 
book  is  the  third  number. 

THE  AUTHOR. 
Chicago,  March  1,  1905. 


Digitized  by  the  Internet  Archive 
in  2007 


http://archive.org/details/costofproductionOObeanrieh 


CONTENTS 

PART  L— THE  SCIENCE  OF  COSTS 

CHAPTER  I— UTILITY  OF  A  COST  SYSTEM 

The  price  of  a  competitor  no  guide — The  argument  of  lower  price — 
Printing  and  Costs — The  "collar  button  man"  and  the  printer— Costs 

and  labor Pages  1-6 

CHAPTER  II.— DEVELOPMENT  OF  THE  SCIENCE  OF 
COSTS 

Early  natural  advantages — The  "established"  firm  versus  the  com- 
petitor— The  Trust  as  related  to  low  productive  cost — Growth  of  the 
science  of  Costs — Scarcity  of  the  really  competent  employ^ — Installa- 
tion of  a  cost  system Pages  7-13 

CHAPTER  III.— ELEMENTS  OF  THE  SCIENCE  OF  COSTS 

Costs  not  an  exact  science — Burden  the  element  which  complicates 
Costs — The  elements  Prime  Cost  and  Direct  Labor — Relation  of  Costs 
to  Factory  Organization — Costs  and  the  engineer — Business  shrewdness 
and  the  knowledge  of  Costs— Relation  of  Costs  to  the  accountant — In- 
accuracies in  the  use  of  term  "Cost  Accounting" — Relation  of  Costs 
of  the  salesman — Relation  of  Costs  to  the  buyer Pages  14-24 

CHAPTER     IV.— SELLING     PRICE— THE     FACTORS     COM- 
POSING IT 

The  brace  system  of  graphic  representation — Cost  to  Make  and  Sell 
—Inexact  use  of  terms Pages  25-29 

CHAPTER  V.— MATERIAL 

Definition — Value  of  material — Cost  of  material — Supervision  of  stores 
— Fluctuation  in  price  of  material — Requisition  for  stores — The  stores 
invoice  book — Orders  for  stores— Diverted  stores Pages  30-40 

CHAPTER  VI.— LABOR 

Price  considered  as  Cumulative  Labor  Cost — Employ^  record— The 
tally  system  described — Wage  plans — The  day's-work  plan — Institution 
and  workings  of  the  piece-work  plan — Drawbacks  of  the  piece-work 
plan— Methods  of  figuring  probable  time — The  premium  plan — The 
bonus  system — The  profit-sharing  plan Pages  41-57 

CHAPTER  VII.— BURDEN  . 

Constituent  elements  of  Burden — Apportionment  of  Burden — The 
percentage  burden  plan — The  hourly  burden  plan — The  machine-rate 
plan — The  scientific  machine-rate  plan — What  system  ? Pages  58-66 

CHAPTER  VIII.— INDIRECT  LABOR 
The   term    "non-productive" — Exclusion   of    selling   expense  from 
Burden — Indirect  labor  calculation — Salaries -.  Pages  67-71 

vii 


viii  CONTENTS 

CHAPTER  IX.— MINOR  BURDEN  ELEMENTS 

Power — Heat — Light — Rent — Taxes — Insurance Pages  72-74 

CHAPTER    X.— DEPRECIATION,     UPKEEP,     AND     OTHER 
FACTORS 

Related  factors — Depreciation  studied  by  insurers — Depreciation  and 
the  factory  buildings — A  common  method  of  depreciation— Upkeep 
neglected  to  swell  dividends — Provision  for  growth  of  plant — Periodic 
valuation — Adjustment  values— Contributory  causes  specified — Tenure 
or  holding — Permanency  of  employment — Manufacture  and  disposal 
of  product — Figuring  depreciation  to  meet  fluctuating  demand — New 
methods  and  inventions — New  machines  called  for  to  improve  the  prod- 
uct— Contingencies  not  to  be  insured  against — Appreciation  of  site — 
Depreciation  based  upon  valuation — Method  of  calculating  depreciation 
— Lack  of  uniformity  in  systems — Simplicity  of  blanket  depreciation — 
Classification — Land  or  site — Depreciation  of  machinery. . .  Pages  75-97 

CHAPTER  XI.— SELLING  EXPENSE 

Office  expense — Making  and  Selling — Salesmen — Estimating — Ad- 
vertising— Traveling — Indirect  expense Pages  98-104 

CHAPTER  XII.— THE  FACTORS  OF  SELLING  EXPENSE 

Office  expense — Estimates,  to  what  chargeable — Advertising  and  good 
will — Traveling  expenses — Indirect  expense — No  rule  for  direct  ex- 
pense   Pages  105-110 

CHAPTER  XIII.— PROFIT 

Profit  comprehends  other  factors — Interest,  where  chargeable — 
What  profit  really  is — Conclusion Pages  111-115 

PART  II.— ILLUSTRATIVE  COST  SYSTEMS 

CHAPTER  XIV.— A  FACTORY  COST  SYSTEM 

Edric  C.  Warren,  Johnstown,  Pa Pages  119-124 

CHAPTER  XV.— REGARDING  FACTORY  COSTS 

L.  A.  Ely Pages  125-130 

CHAPTER  XVI.— THE  COST  OF  WOOD  WORKING 

Pages 131-139 

CHAPTER  XVII.— ASCERTAINING  THE  COST  OF 
PRODUCTION 

E.  J.  Hathaway Pages  140-149 

CHAPTER  XVIII.— HOW  FACTORY  COSTS  ARE  FOUND 

Norton  W.  Charles Pages  150-160 

CHAPTER  XIX— THE  COST  OF  PRODUCTION 

Charles  J.  Watts Pages  161-196 

Index Pages  197-198 


THE    COST   OF   PKODUCTION 

PART  I 


IX 


THE  SCIENCE  OF  COSTS 

CHAPTER    I 

UTILITY  OF  A  COST  SYSTEM 

The  fact  that  supply  and  demand  sets  the  price  of 
a  product,  seems  on  its  face  to  be  an  argument  against 
the  use  of  cost  systems,  but  a  moment's  considera- 
tion shows  otherwise.  Demand,  in  these  days  of  adver- 
tising, may  be  created,  and  after  creation,  cultivated 
to  a  point  where  it  becomes  profitable.  At  what  point 
does  it  become  a  profitable  one?  An  accurate  cost  sys- 
tem answers  the  question.  Then,  too,  when  demand  is 
slack,  how  far  can  the  producer  lower  his  price  in  order 
to  stimulate  orders?  Not  permanently  below  the  cost 
of  production,  or  he  will  force  himself  out  of  business. 

The  method  of  setting  prices  by  the  price  obtained 
by  a  competitor  is  too  nearly  akin  to  the  old  rule  of 

thumb  to  be  seriously  considered.    Yet  it 
The  Price  of  a 

Competitor  is  a  custom  that  is  held  to  by  many  manu- 
facturers on  the  theory  that  the  price 
affording  "the  other  fellow"  a  living  profit  will  do  for 
them.  This  is  nowhere  more  plainly  shown  than  in  the 
sale  of  fire  insurance.  The  rate  at  which  a  risk  can  be 
carried  is  determined  by  the  concerted  action  of  the 
leading  companies,  and  the  others  accept  those  ratings 


2  COST  OF  PRODUCTION 

as  final,  and  take  them  as  a  guide,  though  the  cost  to 
the  various  companies  to  carry  the  same  risk  may  vary 
greatly.  Small  firms,  trailing  a  larger  one,  resort  most 
to  this  method  of  price  making. 

The  need  of  a  cost  system  is  nowhere  more  empha- 
sized than  in  the  meeting  of  competition.     The  stock 

argument  of  the  entire  fraternitv  of  buy- 
The  Argument 
of  Lower  ers  is,  "  'So-and-so'  can  sell  me  the  same 

goods  for  'so  much'  less."  Age  can  not 
wither  nor  custom  stale  this  plea  of  the  buyer.  It  is 
the  one  remark  which,  express  or  implied,  enters  into 
the  preliminaries  of  nearly  every  contract  known  to  law. 
A  comprehensive  and  accurate  cost  system  can  answer 
under  such  conditions,  whether  or  not  such  competition 
can  be  met,  and  if  not,  the  proposition  can  be  declined 
with  the  absolute  surety  that  money  is  being  made  by 
such  declination. 

As  a  class  of  businesses  run  without  regard  to  the 
cost  of  the  finished  product,  the  small  country  printers 
stand  as  an  example.  Job  work  is  an  adjunct  to  the 
regular  business  of  getting  the  paper,  and  money  re- 
ceived therefrom  is  regarded  as  a  pick-up  as  compared 
with  the  slower  yielding  subscription  list.  Prices  are 
made  almost  by  guess  or  to  meet  the  price  the  customer 
says  was  made  him  by  the  other  shop.  What  is  the  re- 
sult? The  printer  finds  himself  with  a 
Printing  ^ 

and  depreciated  plant,  the  best  years  of  his 

Costs 

life   spent,    and    no   means   of   renewing 

either.     He  is  the  victim  of  a  vicious  cost  system — or 


A  RUDIMENTARY  EXAMPLE  3 

rather  lack  of  system.  Costs  accurately  figured  and 
persistently  lived  up  to,  would  have  one  of  two  results : 
Prices  would  be  raised  to  a  living  rate,  or  he  would 
seek  some  business  where  such  prices  could  be  obtained. 

This  idea  is  taken  up  by  the  American  Printer  in 
the  following  words: 

"How  many  printers  passing  through  the  crowded 

streets  of  a  city,  would  expect  to  find  in  the  humble 

'collar-button  man,'  standing  on  the  edge 
The  Collar-  '  &  to 

Button  Man  and  of  the  sidewalk  to  hawk  his  illusive  gilded 

the  Printer  .  , .  ,  . 

wares,  one  more  business  wise  than  him- 
self? And  yet  this  vendor's  method  adopted  by  the 
printer,  would  often  raise  him  from  the  discomforts  of 
a  meager  income  to  the  enjoyment  of  a  'good  thing.' 
It  would  all  hinge  upon  the  known  cost  of  the  merchan- 
dise being  handled.  The  street  tradesman  knows  that 
his  buttons  cost  him  one  cent  each;  and  that,  if  he 
sells  one  for  five  cents  he  is  four  cents  to  the  good.  The 
proposition  for  him  is  simplified,  in  that  he  pays  no 
rent,  employs  no  help — sets  no  type,  and  is  free  from 
the  eagle  eye  of  the  paper  man.  But,  nevertheless,  the 
printer  would  do  well  to  absorb  the  main  fact  here  in- 
volved ;  that  when  actual  cost  is  known  a  price  is  pos- 
sible that  shall  include  a  profit;  and  the  profit,  we 
assume,  is  the  chief  reason  that  influences  a  printer  to 
give  up  his  days  and  nights  to  the  occupation  that  en- 
gages him.  Then  it  is  up  to  said  printer  to  make  his 
prices  include  the  costs — all  of  them ;  else  he  will  come 
out  of  the  small  end  of  the  horn  with  nothing  at  hand 


4  COST  OF  PRODUCTION 

more  tangible  than  noise.  The  first  step  toward  price- 
making  that  shall  include  costs  is  the  installation  of 
such  a  system  as  will  secure  exact  knowledge  of  these 
costs.  *  *  *  The  most  vital  need  of  the  new  year 
for  a  great  many  of  our  readers  is,  confessedly,  the 
adoption  of  a  cost  system  that  shall  enable  the  pro 
prietor  of  a  printing  plant  to  know  what  to  charge  for 
his  output,  based  on  what  it  costs  him  to  produce  it. 
*  *  *  We  hope  this  matter  of  'known  costs'  will 
have  the  attention  it  deserves  at  the  hands  of  printers 
prone  to  ignore  it." 

From  the  standpoint  of  the  manufacturer,  the  need 
of  a  cost  system  is  even  more  pressing,  as  his  invest- 
ment is  usually  large  and  coupled  with  interests  which 
are  far-reaching  in  extent. 

Speaking  on  the  subject  of  "Cost  Computation," 
retiring  President  F.  E.  Meyers  of  the  National  Asso- 
ciation of  Agricultural  Implement  and  Vehicle  Manu- 
facturers, at  their  recent  convention  at  Chattanooga, 
said: 

"Unless  manufacturers  study  costs  carefully,  they 
are  simply  groping  in  the  dark.  They  may  possibly 
make  money,  but  it  is  more  likely  that  without  a  knowl- 
edge of  what  their  products  are  costing  them,  they  will 
surely  run  into  the  hands  of  a  receiver. 

"Inquiry  into  the  cause  of  failure  of  a  few  esteemed 
business  friends  reveals  the  fact  that  they  were  de- 
ceived by  their  superintendents  and  foremen,  who  had 


COST  COMPUTATION  5 

made  false  calculations  and  statements  concerning  the 
cost  of  material,  labor,  etc. 

"It  is  manifest  that  we  should  take  this  matter  into 
our  own  hands  and  on  an  intelligent  basis  make  our 
price,  regardless  of  what  others  do. 

"The  American  manufacturer  to  be  successful  must 
be  an  economist,  know  exact  costs  and  have  the  cour- 
age to  abandon  slipshod  ways  of  product." 

As  a  record  acting  as  a  business  guide,  a  satisfac- 
tory system  of  cost  keeping  is  unexcelled.  One  cost 
account  standing  alone  is  valueless — an  industrial  waif 
of  most  uncertain  status — but  as  a  part  of  a  systematic 
record  it  becomes  as  useful  as  a  guide  as  a  compass  is 
to  a  ship.  The  value  of  costs  lies  entirely  in  comparison. 
The  comparative  records  of  cost  of  a  machine  or  prod- 
uct become  of  immense  value  in  determining  the  future 
of  a  business  proposition,  the  efficiency  of  the  manage- 
ment in  the  past,  and  a  thousand  and  one  intermeshing 
questions  often  coming  up  in  the  administration  of 
affairs. 

While  as  a  general  proposition  it  may  be  said  that 
the  value  of  a  cost-keeping  system  varies  in  value  di- 
rectly as  its  completeness,  there  may  be,  of  course, 
limiting  circumstances  which  qualify  such  statement. 
In  a  factory  having  a  monopoly  of  a  certain  electrical 
machine,  because  of  the  ownership  of  controlling 
patents,  these  machines  not  being  subject  to  compe- 
tition, and  put  out  at  a  profit  of  200  to  300  per  cent, 


6  COST  OF  PRODUCTION 

a  rudimentary  cost  system  would  do.  In  an  iron  or 
steel  works  subject  to  the  severest  competition,  the 
most  detailed  cost  system  possible  would  be  required. 
A  thorough  understanding  of  the  value  and  efficacy 
of  labor  is  one  of  the  important  results  of  a  proper 
system  of  costs.  If  the  employer  has  at  all  times  posi- 
tive information  as  to  the  productiveness  of  the  indi- 
vidual employe,  he  not  only  has  the  means  of  putting 
the  employe'  upon  a  just  and  equitable  wage  basis,  but 

he  has  also  a  means  of  protection  against 
Costs  ^ 

and  strikes  called  because  of  the  discharge  of 

Labor 

inefficient  workmen.      Not  only  does  the 

fact  that  a  close  and  accurate  daily  efficiency  record  is 
being  kept,  incite  the  employe"  to  better  efforts,  but  it 
restrains  him  from  making  unreasonable  demands — 
demands  which  may  be  the  beginning  of  strike  agita- 
tion. Much  might  be  said  on  this  point — also  on  the 
need  of  a  far-reaching  and  accurate  check  on  the  time- 
reports  of  both  foremen  and  employe's — but  the  experi- 
ence of  the  employer  is  open  to  anyone  who  cares  to 
interview  him. 


CHAPTER    II 

DEVELOPMENT   OF   THE   SCIENCE   OF   COSTS 

The  history  of  the  cost  of  the  made  or  manufac- 
tured product  lies  well  within  the  developments  of  the 
last  few  decades,  particularly  in  the  United  States. 
The  reason  for  this  is  three-fold :  First,  the  wonderful 
natural  resources  of  the  United  States;  second,  the 
tendency  to  lower  prices  caused  by  competition ;  third, 
the  influence  of  trusts  and  combinations. 

The  early  settlers  in  this  country  found  a  virgin 

field  for  every  species  of  undertaking.     The  soil  was 

rich,  producing  limitless  crops ;  the  forests 

Early 

Natural  of  wide  extent,  with  timber  to  be  had  for 

Advantages 

the  taking ;  and  the  various  minerals  only 
needed  bringing  to  the  surface  and  the  rudest  metal- 
lurgical process  to  yield  in  paying  quantities.  This 
was  the  time  of  small  operations  and  crude  processes. 
The  producer  was  to  little  expense  for  his  raw  material 
and  labor,  and  had  no  thought  of  nor  use  for  the  thou- 
sand and  one  essentials  and  accessories  to  trade  which 
now  are  nearly  universal  in  use  and  application. 

Until  comparatively  recent  times  old  and  long 
established  firms  have  often  held  their  place  in  the  field 
of  commercial  supremacy,  because  of  the  fact  that  they 
were  established  and   had   honorable  and   successful 

7 


8  COST  OF  PRODUCTION 

records  to  back  them  up.  So  fortified,  they  were  enabled 
The  "  Estab-  to  meet  all  comers  in  their  particular  field, 
versus"^™  asking  and  obtaining  better  prices  than 
Competitor  their  less  experienced  rivals.  This  can 
hardly  be  said  to  be  true  at  the  present  time.  No 
sooner  does  a  field  show  a  large  profit  than  the  pro- 
moter, aided  by  capital  wanting  investment,  steps  in 
and,  guided  by  the  cumulative  experience  of  others, 
directed  by  the  best  managerial  talent  to  be  had,  and 
taking  care  of  its  business  by  a  system  practically  per- 
fect, the  new  venturer  in  the  commercial  arena  often 
bests  its  older  rival.  This  competition,  of  course,  re- 
sults in  a  substantial  reduction  of  prices,  particularly 
if  the  old  selling  price  was  high  because  of  monopoly, 
rather  than  because  of  technical  knowledge  and  skill 
required  in  its  manufacture  and  sale. 

Recent  times,  too,  have  seen  the  development  of  the 
trust.  The  liberty  allowed  under  the  corporation  laws 
of  various  states  has  been  taken  full  advantage  of  by 
many  industrial  organizations,  and  these  combinations 
are  often  so  arranged  that  the  real  profit  of  twenty-five 
per  cent  or  larger  is  so  distributed  by  means  of  stock 
The  Trust  as  judiciously  "watered,"  that  the  share- 
ProductiveLOW  holder  not  on  the  inside,  comes  in  for  only 
Costs  a  modest  five  or  six  per  cent.    This  re- 

quires, then,  in  order  that  the  overcapitalized  organiza- 
tion may  bear  the  imposed  burden  of  dividends  on 
watered  stock,  that  the  production  cost  be  reduced  to 
the  lowest  possible  figure. 


DEVELOPMENT  9 

These  three  causes — appreciation  in  value  of 
natural  resources,  growth  of  competition,  and  rise  of 
the  trusts — have  been  the  important  factors  in  develop- 
ing the  science  of  costs  in  America. 

The  older  countries,  however,  restricted  in  their 
natural  resources,  having  competition  highly  developed 
for  decades  and  accustomed  to  perfected  organizations 
somewhat  similar  to  the  modern  trust,  have  given  the 
science  of  costs  more  study  than  the  younger  and  more 
wasteful  nations.  As  early  as  1832,  Charles  Babbage, 
A.  M.,  professor  of  mathematics  in  the  University  of 
Cambridge,  England,  issued  a  comprehensive  volume  of 
282  duodecimo  pages  under  the  title,  "On  the  Economy 
of  Machinery  'and  Manufactures."  Several  of  the 
thirty-two  chapters  of  the  book  relate  directly  to  the 
science  of  costs,  Chapter  XX,  "On  the  Separate  Cost  of 
Each  Process  in  a  Manufacture,''  reading  in  part  as 
follows : 

"The  great  competition  introduced  by  machinery, 
and  the  application  of  the  principle  of  the  subdivision 
of  labor,  render  it  continually  necessary  for  each  pro- 
ducer to  be  on  the  watch,  to  discover  improved  methods 
by  which  the  cost  of  the  article  he  manufactures  may 
be  reduced;  and,  with  this  in  view,  it  is  of  great  im- 
portance to  know  the  precise  expense  of  every  process, 
as  well  as  of  the  wear  and  tear  of  the  machinery  which 
is  due  to  it.  The  same  information  is  desirable  for 
others,  through  whose  hands  the  manufactured  goods 
are  distributed ;  because  it  enables  them  to  give  reason- 


10  COST  OF  PRODUCTION 

able  answers  or  explanations  to  the  objections  of  in- 
quirers, and  also  affords  them  a  better  chance  of  sug- 
gesting to  the  manufacturer  changes  in  the  fashion  of 
his  goods,  which  may  be  more  suitable  either  to  the 
tastes  or  to  the  finances  of  his  customers.  To  the 
statesman  such  knowledge  is  still  more  important;  as 
without  it  he  must  trust  entirely  to  others,  and  can 
form  no  judgment  worthy  of  confidence,  of  the  effect 
any  tax  may  produce,  or  of  the  injury  the  manufacturer 
or  the  country  may  suffer  by  its  imposition. 

"One  of  the  first  advantages  which  suggests  itself 
as  likely  to  arise  from  a  correct  analysis  of  the  expense 
of  the  several  processes  of  any  manufacture,  is  the  in- 
dication which  it  furnishes  of  the  course  in  which  im- 
provement should  be  directed.  If  any  method  should 
be  contrived  of  diminishing  by  one-fourth  the  time 
required  for  fixing  on  the  heads  of  the  pins,  the  expense 
of  making  them  would  be  reduced  about  thirteen  per 
cent,  whilst  a  reduction  of  one-half  the  time  employed 
in  spinning  the  coil  of  wire  out  of  which  the  heads  are 
cut,  would  scarcely  make  any  sensible  difference  in  the 
cost  of  manufacture  of  the  whole  article.  It  is,  there- 
fore, obvious  that  the  attention  would  be  much  more 
advantageously  directed  to  shortening  the  former  than 
the  latter  process." 

This  writer  was  far  in  advance  of  the  time  in 
which  he  lived,  as  the  foregoing  paragraphs  will  bear 
witness,  and  when  it  is  considered  that  he  entered 
minutely   into   many   questions   now  important  ones, 


GROWTH  OF  COSTS  11 

anticipating  problems  of  the  present  day,  the  import- 
ance of  his  work  may  be  better  judged. 

It  may  be  safely  said,  however,  that  not  until  the 
80's  was  the  science  of  costs  considered  of  sufficient 

weight  in  the  administration  and  record 
Growth  of  the  ° 

Science  of  of   manufacturing,    to   be   taken    up   by 

Costs 

either   America   or   the   older   countries. 

That  decade  saw  several  books  on  the  subject  issue  and 
a  relatively  small  per  cent  of  older  manufactories  in- 
stall simple  systems.  From  1890  to  the  present  time, 
costs  and  cost  systems  have  been  studied,  tried  and  im- 
proved upon  and  the  present  year  sees  an  interest  taken 
in  the  science  proportionate  to  its  importance.  It  is 
safe  to  predict  that  an  exact  appreciation  of  the  true 
importance  of  costs  will  not  be  long  in  pervading  all 
branches  of  business  to  which  it  may  be  profitably  ap- 
plied. Manufacturers  are  not  only  awake  to  the  im- 
portance of  cost-knowing,  but  are  generally  instituting 
systems  of  cost  determining  and  recording. 

The  present  status  of  costs  in  industry  is  an 
anomalous  one.  The  manufacturer  is  anxious  to  know 
his  costs,  but  he  has  not  yet  the  faith  in  the  accuracy 
of  cost  accounting  methods.  He  hates  to  run  by 
schedule  while  his  competitor  runs  "wild."  This  is 
due  partly  to  the  idea  that  cost  finding  is  a  mysterious 
process,  not  readily  comprehended  by  the  ordinary 
business  man  and  partly  to  the  fact  that  competent 
cost  keepers — men  understanding  the  various  ramifi- 
cations of  business  into  which  cost  finding  runs — are 


12  COST  OF  PRODUCTION 

hard  to  find.     Only  the  employer  who  has  to  put  up 

with  indifferent  help,   thoroughly  realizes  what  this 

means.     With  the  scarcity  of  really  com- 

Scarcity  of  the  J 

Eeaiiy  Compe-  petent  employe's  in  older  branches  of  in- 
tent Employe' 

dustry,  a  new  field  is  liable  to  invasion 

by  those  manifestly  incompetent,  who  rely  on  a  compli- 
cated lot  of  data  and  a  strong  bluff  to  pull  them 
through.  It  is  a  fair  assumption  that  the  subject  of 
costs  is  as  difficult  as  stenographic  work,  and  the  busi- 
ness man  of  even  limited  experience  knows  the  diffi- 
culty of  securing  from  among  the  thousands  claiming 
a  knowledge  of  the  art,  one  who  is  really  competent; 
this,  too,  in  view  of  the  fact  that  the  employer  is  com- 
petent to  judge  immediately  of  the  qualifications  of  the 
employ^  and  to  secure  a  successor  at  once.  Only  a  long 
and  thorough  trial  may  reveal  the  incompetency  of  a 
cost  system  or  the  employ^  in  charge  of  it. 

The  status  of  costs  today  sometimes  is  compar- 
able to  the  condition  of  various  lines  of  machine  trade 
a  decade  ago.  Ten  years  ago  a  man  selling  electrical 
coal  mining  machinery,  stood  to  lose  anywhere  along 
the  line.    First,  he  must  overcome  the  prejudices  of  the 

companv  buyer,  the  mine  foreman,  and  to 
Installation  v      J        J     ' 

of  a  Cost  some  extent  the  men,  before  getting  his 

system  in.     Second,  he  must  teach  those 

who  were  to  handle  the  machinery,  the  methods  of 

work.     Third,  he  must  judge  accurately  the  working 

conditions  and  map  out  the  way  ahead  for  the  installed 

system  to  continue  to  show  actual  results  as  well  as 


ACCURACY  IN  COST  FINDING  13 

latent  potentialities.  Now,  let  the  same  man  go  into  a 
mine  fitted  out  by  him  some  years  ago  and  he  finds  that 
in  some  cases  his  system  has  marched  by  him,  it  has 
been  so  adapted  to  the  surrounding  conditions  that 
many  of  the  under  employe's  can  give  him  pointers  as  to 
its  efficacy.  Because  of  the  better  grasp  of  the  man  of 
administration  to-day,  the  cost  expert  installing  a  sys- 
tem would  find  introduction  much  easier,  but  the  re- 
maining conditions  enumerated  above  often  are  much 
the  same. 

Costs  to  be  of  use  must  be  nearer  accuracy  than 
most  any  other  result  demanded  in  business  adminis- 
tration. If  costs — the  cornerstone  of  the  business 
fabric — is  out  of  true  the  whole  superstructure  is  liable 
to  totter  and  fall  under  the  strain  of  systematic  com- 
petition. Speaking  of  this  phase  of  business  organiza- 
tion, Alexander  H.  Revell  says: 

"A  cardinal  weakness  in  most  factory  systems  is 
a  failure  to  get  at  the  cost  of  production  with  sufficient 
accuracy.  Every  article,  book  or  document  that  will  in 
any  manner  throw  light  upon  this  difficult  problem 
should  be  eagerly  sought  by  the  progressive  manufac- 
turer. He  can  afford  to  neglect  nothing  which  will  aid 
in  the  accuracy  and  ease  with  which  his  cost  of  pro- 
duction is  to  be  determined.  Here  is  a  matter  in  which 
guesswork  will  not  do,  and  where  a  fraction  of  a  cent, 
in  the  ultimate  findings,  is  of  serious  moment." 


CHAPTER    III 

ELEMENTS  OF  THE  SCIENCE  OF  COSTS, 

The  science  of  costs  is  not  an  exact  one,  for  the 

reason  that  the  items  in  many  cases  are  and  can  be 

merely  estimates,  and  as  such  are  subject  to  error. 

True,  a  system  of  costs  may  be  devised  and  worked  so 

as  to  be  satisfactory  to  all  concerned,  but  there  is  not, 

nor  can  there  be,  any  standard  system,  nor  one  that 

can  secure  a  certain  set  of  figures  of  which  may  be 

said :  "This  is  the  exact  cost  of  a  unit  of 
Costs  not  an 

Exact  manufactured  product."     Take  the  item 

Science 

depreciation — treated  in  detail  in  a  suc- 
ceeding chapter — few  authorities  agree  as  to  what  is 
the  annual  depreciation  on  machine  tools  under  pre- 
cisely similar  circumstances.  Assuming  that  deprecia- 
tion charges  were  absolute,  who  can  foresee  the  inven- 
tion of  a  machine  which  renders  a  certain  machine  tool 
worthless — which  immediately  depreciates  its  value  to 
that  of  scrap?  Yet  depreciation  must  enter  into  every 
cost,  and  as  an  unknown  factor  of  the  whole  result 
makes  the  entire  science  of  costs  an  inexact  one. 

The  underlying  principles  of  the  science  of  costs, 
however,  are  not  only  exact  but  surprisingly  simple.  It 
is  only  when  it  comes  to  the  application  of  these  prin- 
ciples that  confusion  results. 

There  may  be  few  or  many  elements  entering  into 
14 


CONSTITUENT  ELEMENTS  15 

the  cost  of  a  product.  The  savage  who,  unaided  by  even 
the  simplest  tools,  takes  the  gold  from  the  auriferous 
bank  of  a  stream,  has  to  do  with  but  one  element  in  the 
cost  of  production — that  of  labor. 

This  may  be  represented  as  follows: 
Cost  =  Labor 

Supposing  the  same  savage  wished  to  construct  a 
teepee,  but  did  not  have  the  skins  and  poles  necessary. 
He  buys  everything  necessary,  erecting  the  structure 
himself.  Cost  to  produce  here  becomes  Material  + 
Labor,  or 

J  Material 
\  Labor 
Here  Material  means  that  which  is  used  in  the  manu- 
facture of  an  industrial  product. 

Now,  if  the  savage  spends  his  time,  instead  of  at 
the  chase,  in  his  hut  making  articles  of  use  or  orna- 
ment, using  tools  necessary  in  such  production,  he  be- 
comes the  prototype  of  the  manufacturer  of  the  present 
day.  Cost  to  produce — later  called  Factory  Cost — has 
now  become,  Material  +  Labor  +  Burden,  or 

{Material 
Labor 
Burden 
Burden,  as  here  used,  means  the  expense  of  all  appli- 
ances necessary,  including  rent.    Commercially,  it  in- 
cludes more,  as  will  be  treated  later  on. 

It  is  with  the  introduction  of  this  factor,  Burden, 
that  the  science  of  costs  becomes  a  complicated  one. 


16  COST  OF  PRODUCTION 

As  long  as  material  and  labor  were  the  only  elements 
entering  into  the  product  it  was  possible  to  determine 
Burden  the  Ele-  to  exactness  the  cost.  In  the  example 
completes  Just  Siven  Burden  would  be  made  up  of 
Costs  practically  one  item,  depreciation  of  the 

hut  and  tools  in  which  the  savage  performed  his  work. 
If  the  work  was  of  a  class  requiring  the  use  of  light  and 
heat  also,  Burden  would  be  thus  represented: 

{Depreciation  of  (a)  house;  (b)  tools 
Heat 
Light 
A  clear  understanding  of  the  three  items,  Material, 
Labor,  and  Burden,  constitute  the  whole  of  the  science 
of  production  costs,  in  the  restricted  use  of  the  term. 
Production  and  selling  are  distinct  sciences,  requiring 
the  application  of  entirely  different  talents.  Restrict- 
edly,  therefore,  production  cost  or  cost  to  produce  does 
not  comprehend  or  take  account  of  the  cost  of  selling. 
Practically,  selling  expense  is  one  of  the  most  import- 
ant factors  in  the  science  of  costs.  Often  an  entire 
product  would  be  useless  were  it  not  for  the  selling  de- 
partment and  consequent  selling  expense.  When  this 
factor,  Selling  Expense,  is  added  to  production  cost  it 
gives  "Cost  to  Make  and  Sell,"  as  follows :  Production 
Cost  +  Selling  Expense  =  Cost  to  Make  and  Sell,  or 

{T    ™     j     .l-      /t-.       f  Material 
I.  Production  (Fac-J 
tory)  Cost  1  Lab°r 

I  Burden 
II.  Selling  Expense 


1.  Factory 
Cost      i  (b)  Lab0r 

2.  Selling     L  <°>  Burden * 
Expense 


PRIME  COST  AND  DIRECT  LABOR  17 

When  a  product  is  to  be  disposed  of,  to  the  cost  of 

making  and  selling  must  be  added  the  final  factor, 

Profit,  for  without  equitable  profit  the  business  can  not 

continue.    This  brings  the  selling  price :  Cost  to  Make 

and  Sell  +  Profit  =  Selling  Price,  or 

t    r*    ++   tit  i     ^    ™    ^        f(a)   Material 
I.  Cost  to  Make  ' 

Selling  I         and  Sell 

Price 

*1L  Profit 

The  foregoing  outline  is  as  complete  as  need  be 

made  before  going  further,  with  one  exception,  which  is 

this:   Above,  Factory  Cost  is  divided  into  three  equal 

elements,    Material,    Labor,    and    Burden.      Labor  + 

Material  has  been  used  by  the  older  writers  on  costs  to 

mean  Prime  Cost.    Labor  as  so  used,  is  restricted  in 

meaning  to  the  wages  of  those  operatives  whose  time 

is  so  spent  that  it  can  be  reckoned  for  charge  against 

the  individual  article  or  articles  made.     A  common, 

though  less  exact  conception  of  Direct  Labor,  is,  that 

class  of  labor  which  actually  produces  in 
The  Elements 
Prime  coat  and    part  or  whole  the  made  or  manufactured 

article.  Direct  Labor  is  also  called,  Pro- 
ductive Labor  and  Non-diffused  Labor,  the  former  term 
being  a  common  one,  all  being  synonymous.  The  opera- 
tive who  makes  a  casting  for  a  machine;  the  one  who 
polishes  it  and  fits  it  into  place;  the  mechanic  who 
finally  adjusts  the  entire  mechanism  before  the  machine 
is  put  out — the  work  of  each  falls  within  the  division 
Direct  Labor. 
2 


18  COST  OF  PRODUCTION 

Opposed  to  Direct  Labor  we  have  Indirect  Labor, 
also  termed  Non-productive  Labor  (this  being  a  very 
common  designation),  or  Diffused  Labor.  Indirect 
Labor  is  that  labor  which,  by  reason  of  its  general 
effect,  can  not  be  reckoned  for  charge  against  the  indi- 
vidual article  or  articles  made.  Indirect  Labor,  like 
Direct  Labor,  has  a  more  common  but  less  exact  defi- 
nition, when  stated  to  be  "that  class  of  labor  which 
does  not  actually  produce  in  part  or  whole  the  made  or 
manufactured  article."  Perhaps  the  best  illustration  of 
Non-productive  Labor  is  that  of  the  supervising  fore- 
man, who  merely  oversees  his  workmen. 

Taking,  therefore,  the  division  as  held  to  by  the 
older  authorities  on  the  subject,  Factory  Cost  is  thus 
resolved  into  its  elements : 

f   I.  Prime  Cost  Z1-  Material 
Factory  Cost  <  L  2.  Direct  Labor 

I  II.  Burden 

This  seems  to  be  the  logical  division  and  the  one  to 
which  many  competent  authorities  lend  their  sanction. 
Prime  Cost  means  first  cost.  It  can  mean  nothing  else, 
and  the  first  cost  is  simply  the  cost  of  the  material  used 
in  the  actual  making  plus  the  cost  of  the  labor  neces- 
sary to  produce  the  article  made.  The  reader  of  con- 
temporaneous literature  on  costs  will  be  saved  con- 
siderable trouble  by  remembering  that  engineering 
literature  commonly  uses  the  term  in  the  above  sense, 
while  writers  treating  the  subject  from  an  accounting 
standpoint  often  lump  in  the  factor  Burden  or  some 


FACTORY  ORGANIZATION  ^c   fife 


part  of  it.  It  is  to  be  regretted  that  this  discrepanc 
in  the  use  of  the  term  Prime  Cost  exists,  as  the  in- 
clusion or  exclusion  of  Burden  in  Prime  Cost  is  an 
arbitrary  one.  Prime  Cost  is  synonymous  with  the 
term  Book  Cost,  used  by  late  authorities. 

In  its  broad  sense,  Burden  is  collectively  such 
charges  as  are  accessory  to  the  making  or  manufacture 
of  a  product  not  including  the  Direct  Labor  or  Material 
entering  into  it. 

The  science  of  costs  intermeshes  with  numerous 
phases  of  industrial  economy,  but  has  to  do  principally 
with  three  divisions:  (1)  Factory  organization;  (2) 
factory  management;  (3)  factory  records. 

There  is  but  one  right  way  to  produce  a  given 
thing,  and  it  lies  within  the  scope  of  factory  organiza- 
tion to  perfect  the  plans  by  which  a  given  product  may 
be  produced  at  a  minimum  of  labor  and  expense.  This 
requires  the  exercise  of  the  highest  faculties  of  the 
human  brain.  As  a  basis  from  which  to  work,  inti- 
mate knowledge  of  the  various  processes  through  which 

„  .    .       ■         the  raw  material  must  pass  before  finally 
Eelation  of  v  J 

Costs  to  Factory  becoming  the  finished  product,  must  be 

Organization  v 

had;  combined  with  this  must  be  an  ex- 
act knowledge  of  the  industrial  advantages  and  disad- 
vantages of  location,  both  as  regards  the  factory  itself 
aud  its  component  parts ;  lighting,  heat,  and  ventilation 
must  be  studied  that  the  operatives  may  work  to  the 
best  advantage;  areas  must  be  carefully  considered  so 
as  to  afford  sufficient  room  for  growth  without  re- 


20  COST  OF  PRODUCTION 

modeling,  and  limitless  other  questions  of  scarce  less 
importance  must  be  decided  before  a  single  nail  can  be 
driven  or  a  stone  raised.  All  this  lies  within  the  prov- 
ince of  the  engineer.  Engineering  might,  in  fact,  be 
defined  as  the  science  of  economical  production. 

The  relation  of  the  science  of  costs  to  the  engineer 

is  therefore  an  intimate  one,  and  one  to  which  the 

future  engineering  curriculum   will  pay 

and  the  close  attention.  The  engineer  is  peculiarly 

Engineer 

fitted  to  deal  with  costs  for  the  reason 

that  he  is  used  to  dealing  with  inexact  data,  from  them 

obtaining  the  most  exact  deductions.    Working  at  all 

times  mindful   of  a  margin   of  error  and  having  a 

precise  and  first-hand  knowledge  of  basic  principles, 

he  is  competent  to  approach  the  subject  of  costs  from  a 

broad  plane,  solving  doubtful  cases  by  the  exercise  of 

common  sense  rather  than  by  slavish  conformity  to 

rule. 

The  factory  having  been  erected  and  ready  to  run, 

its  future  lies  with  the  factory  manager.     The  one 

talent  the  manager  of  a  business  can  worst  do  without 

is  business  shrewdness.    He  may  have  trade  and  process 

knowledge  and  know  the  business  he  controls  from 

inception  to  close,  but  if  he  has  not  or  can  not  acquire 

the  indescribable  sixth  sense,  shrewdness  in  business, 

he  might  as  well  shut  up  shop  at  once,  for  it  will  be 

only  by  the  means  of  remarkable  good  luck,  combined 

with  a  train  of  favorable  circumstances  that  he  will  be 

enabled  to  stay  in  business  at  all.    Now,  what  has  this 


COSTS  AND  ACCOUNTING  21 

to  do  with  costs  ?  Only  this :  Every  shrewd  business 
man  has  an  exact — though  often  intuitive — knowledge 
Business  of  costs.    Just  as  we  see  artists  who  paint 

a SjSSfJ*-  witnout  instruction  and  apparently  with- 
of  costs  out    method,    because    of    an    inherent 

knowledge  of  art,  so  we  find  those  men  who  require  no 
complicated  process  of  cost  determining  for  their  own 
information,  as  they  have  the  skill  to  dispose  of  their 
product  at  a  price  above  the  danger  line.  They  know 
the  danger  line  of  low  prices  is  there,  and  are  able  to 
sense  the  approach  to  it,  and  by  turning  every  energy, 
more  to  an  increase  of  income  than  to  a  radical  reduc- 
tion of  costs,  they  are  able  to  do  a  constantly  prosper- 
ous business. 

Upon  the  manager  devolves  the  manifold  duties  of 
the  superintendence  of  the  factory,  and  his  success  is 
intimately  connected  with  his  knowledge  of  costs ;  gen- 
erally, a  knowledge  of  costs  in  his  particular  line  and 
in  related  lines;  specifically,  a  knowledge  of  the  cost 
of  his  product  as  turned  out  by  his  factory.  Knowing 
both  these  factors,  the  base  for  success  is  laid.  It  is 
the  function  of  one  of  the  departments  of  a  business  to 
record  the  financial  transactions  as  they  occur.  This 
Relation  of         comes  in  the  province  of  the  bookkeeper. 

BooU^£?or  If  SUGh  work  is  of  hi3h  ^ade  and  of  more 
Accountant         than    ordinary    importance,    bookkeeping 

becomes  accountancy,  and  the  bookkeeper,  an  account- 
ant. Cost  determining  does  not  lie  within  the  scope  of 
either  bookkeeping  or  accounting.    Cost  recording  does. 


22  COST  OF  PRODUCTION 

The  accurate  determination  of  costs  requires  the  tech- 
nical knowledge  of  the  engineer,  or  the  practical  knowl- 
edege  of  the  business  manager,  or  both,  combined  per- 
haps with  more  or  less  knowledge  of  bookkeeping.  The 
various  costs  having  been  determined,  the  bookkeeper 
sets  them  down,  using  for  his  record  those  forms  which 
experience  and  study  have  shown  him  to  be  the  best 
adapted  to  the  task  in  hand. 

An  excellent  foreign  work  on  the  subject  of  cost 
accounting  treats  the  subject  of  Depreciation  at  length 
and  then  states  that  the  application  of  the  principles 
set  down  does  not  lie  within  the  subject  of  accounts, 
but, 

"However,  is  a  matter  to  be  settled  by  the  pro- 
prietor himself  and  must  largely  depend  upon  existing 
conditions." 

In  order  to  avoid  the  inaccuracy  of  the  term  cost 
accounting,  the  distinctive  terms  "cost  determining" 
inaccuracy  in  and  "cost  recording"  are  used  in  this 
**£"&**  work.  Cost  determining  is  the  finding  of 
Accounting"  such  flata  as  is  necessary  in  the  economi- 
cal administration  of  business  affairs;  cost  recording 
is  the  work  necessary  in  placing  in  required  form  the 
data  so  determined.  The  term  "cost  accounting"  has 
been  used  by  writers  to  have  a  variety  of  meanings,  by 
some  to  comprehend  the  entire  science  of  costs,  which,  as 
before  said,  lies  without  the  scope  of  accounting;  by 
others,  to  include  merely  cost  recording.  Owing  to  the 
true,  restricted  meaning  of  the  term,  "cost  accounting," 


COSTS  AND  SELLING  23 

and  the  looseness  with  which  it  is  employed  in  litera- 
ture, in  this  work  the  terms  "science  of  costs,"  "cost 
determining,"  and  "cost  recording"  are  used  with  ex- 
actness to  mean,  the  entire  range  of  the  subject,  the 
finding  of  cost  data  and  the  recording  of  cost  data,  re- 
spectively. 

The  science  of  costs  is  intimately  related  to  the 
department  of  sales.  Below  the  line  of  demarcation 
which  separates  profit  from  loss  there  is  no  going,  in  a 
well-managed  business.  In  a  credit  business  it  can 
not  be  even  approached,  for  the  percentage  allowed  bad 
debts  must  be  always  reckoned  with.  Price-making,  as 
a  usual  thing  does  not  devolve  upon  the 

Eolation  of 

Costs  to  the  salesman.  He  is  bound  hard  and  fast  to 
Salesman 

his  list.    But  a  knowledge  of  costs  gives 

him  a  basis  from  which  to  do  intelligent  work.  Know- 
ing accurately  the  margin  of  profit  he  is  in  a  position 
to  push  constantly  for  profit-yielding  trade.  In  making 
an  emergency  cut  for  trade,  he  will  not  fall  into  the 
error  of  reducing  prices  so  low  that  he  will  be  subjected 
to  the  humiliation  of  having  the  order  cancelled  by  the 
house.  Were  his  competitior,  too,  guided  by  accurate 
costs,  the  work  of  every  salesman  in  the  field  would  be 
easier,  for  all  would  be  working  from  relatively  the 
same  base,  cost  of  product,  instead  of  empirically  from 
the  sales  list. 

The  science  of  costs  is  also  intimately  related  to 
another  important  department,  the  department  of  buy- 
ing.   The  manager  often  is,  and  by  virtue  of  his  position 


24  COST  OF  PRODUCTION 

should  be,  the  buyer  for  his  factory.    But  this  is  often 
impracticable.    He  may  not  have  the  time  or  the  tech- 
nical knowledge  necessary.    Here  a  knowledge  of  costs 
insures  intelligent  work.    An  example  of 

Relation  of 

Costs  to  the  this  is  illustrated  by  an  incident  taking 
place  within  the  year.  A  firm  which  has 
built  up  a  large  trade  in  stoves  contracted,  at  a  sub- 
stantial salary,  with  a  traveler  who  knew  the  stove 
business  from  its  inception,  being  particularly  well  in- 
formed on  costs.  To  him  was  entrusted  the  buying  for 
the  house.  As  a  direct  result  he  saved  the  firm  his 
salary  for  one  year  before  he  ever  sold  a  bill  of  goods. 

It  is  not  possible,  of  course,  for  a  buyer  of  a  diversi- 
fied line  to  have  as  accurate  knowledge  of  processes  and 
costs  as  a  specialist,  but  a  considerable  knowledge  can 
and  should  be  acquired,  if  a  buyer  wishes  to  render  his 
employer  the  best  possible  service. 


CHAPTER    IV 

SELLING  PRICE— THE  FACTORS  COMPOSING  IT 

If  the  study  of  the  science  of  costs  is  begun  with  the 
lowest  elements  to  which  the  highest  factor — Selling 
Price — is  reducible,  such  treatment,  it  would  seem,  will 
be  the  logical  one.  This  is  true  because  such  elements 
are  introduced  in  the  same  order  as  that  in  which  they 
are  used  in  manufacture  and  are  charged  in  cost  keeping. 

In  providing  a  general  formula  for  a  proposition  it 
must  be  broad  enough  to  embrace  every  possible  ex- 
ample under  a  common  head  and  specific  enough  to  be 
of  use  when  applied.  Many  methods  of  graphic  repre- 
sentation are  empolyed  to  convey  to  the  mind  in  logical 
order,  the  elements  making  up  a  complex  whole.  These 
methods  have  each  more  or  less  merit,  but  the  one 
which  is  the  simplest  and  most  easily  understood  is 
without  doubt  the  brace  method,  or  some  modification 
of  it. 

The  relations  which  exist  between  the  various  fac- 
tors and  elements  in  the  cost  of  production  vary  so 
much  in  size  and  amount  when  measured  by  some 
standard,  that  the  brace  method,  besides  being  as 
simple,  possesses  the  advantage  of  being  applicable  to 
any  business  or  manufacturing  plant,  where  productive 
costs  are  determined.  Careful  reference  to  the  following 
table  will  be  of  great  help. 

25 


26 


COST  OF  PRODUCTION 


A  representation  of  this  method  of  showing  the 
elements  making  up  Selling  Price  is  here  shown : 


as 

f(»)  Prime  Cost/1"  Material 

L  2.  Direct  Labor 

O 

'  1.  Indirect  Labor 

2.  Power 

<3 

3.  Heating,  Light- 

a 

T— 1 

ing,   and  Rent 

OB 

(b)  Burden 

of  Buildings 

— 

a 

J4 

4.  Taxes 

5.  Insurance 

OS 

6.  Depreciation 

o 

-M 
02 
O 

O 

w.  Upkeep 

'1.  Office 
2.  Salesmen 

.       2 

.  Selling  Expense  i 

3.  Estimates 

4.  Advertising 

5.  Traveling 

6.  Indirect  Expense 

I II.  Profit 


Selling  Price  is  made  up  of  the  simple  factor  Profit 
and  the  complex  factor  Cost  to  Make  and  Sell.  The 
selling  price  of  an  article  or  product  is  the  cost  to  the 
consumer  (disregarding  freight  or  like  charges).  It 
is  the  objective  point  of  a  system  of  costs  to  make  the 


COST  TO  MAKE  AND  SELL  27 

selling  price  as  low  or  lower  than  that  of  competitors, 
and  still  keep  the  factor  Profit  as  large  as  possible. 

Profit  is  the  return  from  the  employment  of  capital 
after  all  charges  for  labor,  material,  interest,  deprecia- 
tion, selling  expense,  and  other  expenses  of  the  business 
have  been  deducted.  It  is  the  difference  between  Selling 
Price  and  Cost  to  Make  and  Sell. 

A  misapprehension  of  the  meaning  of  "profit"  is 
responsible  for  a  large  percentage  of  the  failures  in 
business.  This  is  nowhere  better  shown  than  in  certain 
country  stores.  One  who  has  sold  the  country  trade  or 
met  the  individuals  comprising  the  storekeepers  of  the 
smaller  country  towns  knows  how  common  it  is  to  take 
the  difference  between  the  buying  price  of  an  article 
and  its  selling  price,  and  call  that  difference  "profit." 

Cost  to  Make  and  Sell — often  called  Final  Cost  or 
Cost — is  made  up  of  two  complex  factors,  Factory  Cost 
and  Selling  Expense.      Selling  Expense  comprehends 
every  expense  related  to  or  connected  with  the  disposal 
of  a  product.    In  a  machine,  the  following  items  are 
comprehended  under  the  head  Selling  Expense: 
Office 
Salesmen 
Estimating:  (a)  Ordinary; 

(b)  Drawing  Room 
Advertising 
Traveling 
^  Indirect 
These  elements  will  be  taken  up  in  detail  later. 


Selling  Expense 


28  COST  OF  PRODUCTION 

Factory  Cost  is  made  up  of  Prime  Cost  and  Bur- 
den. Burden  has  already  been  defined,  and  may  be 
subdivided  as  follows: 

Indirect  Labor 
Heating,  Lighting,  and  Rent 
of  Buildings 
Burden  i  Taxes 

Insurance 
Depreciation 
k  Upkeep 

Prime  Cost,  as  has  been  taken  up  before,  is  made  up 
of  two  simple  elements,  Direct  Labor  and  Material. 
While  Direct  Labor  is  a  prime  factor,  yet  it  is  some- 
times in  machinery  manufacture  divided  into  classes  as 
follows : 

(Machine  Shop  Labor 
Foundry  Labor 
Drawing  Room  Labor 
This  division  is  the  last  element  derived  in  the  sepa- 
ration of  Selling  Price  into  its  component  parts.    It 
will  be  noticed  that  a  regular  gradation  exists  in  this 
scale.    In  the  descending  scale  from  Selling  Price  to 
Direct  Labor  the  first  element  of  division  is  always  a 
complex  one,  subdividing  until  unity  is  reached,  while 
the  second  element  is  either  simple  or  simply  complex. 
This,  of  course,  is  of  passing  interest  only,  but  helps  to 
fix  the  outline  of  the  science  in  the  mind  of  the  reader. 
The  preceding  outlines  show  the  diagrammatic  rela- 
tions existing  between  the  various  elements  and  factors 


INEXACT  USE  OF  TERMS  29 

of  costs,  as  commonly  accepted  by  the  best  authorities 
to-day.  The  inexact  use  of  terms  by  different  writers 
is  more  common  than  material  differences  in  graphic 
representation,  though  occasionally  both  tend  to  com- 
plicate the  subject. 

The  various  elements  of  the  science  of  costs  having 
been  defined  and  graphically  represented,  each  element, 
beginning  with  Direct  Labor,  will  be  exhaustively 
treated  in  the  order  of  its  introduction  as  an  element 
into  the  final  cost  to  the  buyer. 


CHAPTER    V 

MATERIAL 

Material  is  the  first  great  factor  in  the  cost  of  a 
thing  to  the  producer — the  other  items  being  Labor  and 
Burden. 

That  which  is  used  in  the  manufacture  of  an  in- 
dustrial product,  entering  into  and  becoming  a  part  of 
it,  is  termed  Material. 

The  first  prime  cost  of  any  manufactured  product 
is  the  outlay  for  material.  The  science  of  costs,  there- 
fore, furnishes  a  monetary  history  of  the  progress  of  the 
raw  material  from  the  time  of  its  purchase,  through  its 
transformation,  to  its  completion  as  a  finished  product. 
In  the  ordinary  business  this  history  commences  with 
the  purchase  of  the  raw  material  and  ends  only  with 
the  selling  price.  Theoretically  Cost  to  Make  and  Sell 
is  the  real  objective  point,  but  it  is  the  best  system 
which  stops  only  with  the  final  price,  showing  every 
gradation  between. 

Material  may  be  classified  as  follows : 

{Raw  Material 
Finished  Commodity 
Accessory  Material 
Raw  Material  is  entirely  a  relative  term,  and  may 
be  defined  as  any  material  for  use  in  a  process  before  it 
has  been  subjected  to  that  process.    The  definition  of 

30 


RAW  MATERIAL  31 

raw  material  given  by  H.  C.  Carey  is  as  true  to-day  as 
it  was  fifty  years  ago.  Mr.  Carey  says  in  his  Manual 
of  Social  Science:  "What,  however,  is  raw  material? 
In  answer  to  this  question,  we  may  say, 
Definition  that  all  the  products  of  the  earth  are  in 

turn,  finished  commodity  and  raw  ma- 
terial. Coal  and  ore  are  the  finished  commodity  of  the 
miner,  but  the  raw  material  of  pig-iron.  The  latter  is 
the  finished  commodity  of  the  smelter,  yet  only  the 
raw  material  of  the  puddler,  and  of  him  who  rolls  the 
bar.  The  bar,  again,  is  the  raw  material  of  sheet-iron, 
that,  in  turn,  becoming  the  raw  material  of  the  nail  and 
the  spike.  These  in  time,  become  the  raw  material  of 
the  house,  in  the  diminished  cost  of  which  are  concen- 
trated all  the  changes  in  the  various  stages  of  passage 
from  the  crude  ore  lying  useless  in  the  earth,  to  the 
nail  and  spike,  the  hammer  and  saw,  used  in  the  con- 
struction of  a  dwelling." 

In  the  science  of  costs  the  term  Finished  Com- 
modity designates  any  industrial  product  which  is  in- 
troduced, without  substantial  change,  into  the  compo- 
sition of  another  product,  usually  as  an  accessory  part. 

As  an  example,  a  firm  manufacturing  cement 
mixers  finds  the  demands  of  the  trade  require  that 
motive  power  be  furnished  with  nearly  every  mixer. 
They  manufacture  the  mixer  and  place  it  in  the  ware- 
house, it  then  being,  as  far  as  they  are  concerned,  a 
finished  commodity.  If,  when  the  mixer  is  sold,  an 
electric  motor  is  mounted  and  shipped  with  the  ma- 


32  COST  OF  PRODUCTION 

chine,  such  motor  is  a  finished  commodity  entering  into 
the  make-up  of  the  machine,  it  not  having  been  proc- 
essed into  shape  as  has  the  iron  and  steel  which  go  to 
make  up  the  remainder  of  the  cement-mixing  machine. 

Accessory  Material  is  material  necessary  to  a 
process,  yet  not  actually  entering  into  the  completed 
product,  as  a  scaffold  built  around  a  machine  when 
assembling  it,  and  is  commonly  considered  a  part  of 
general  manufacturing  expense,  particularly  if  the 
material  is  used  again  and  again,  and  not  directly 
chargeable  against  a  particular  job. 

The  matter  of  the  finding  and  apportionment  of  the 
cost  of  material  is  a  simple  one  and  may  be  arrived  at 
with  comparative  exactness.  Material  is 
Material  affected  by  the  daily  fluctuations  of  the 

market,  it  is  true,  but  even  then  a  mean 
price  is  easily  determinable.  Many  factories  contract 
for  a  year's  supply  of  a  product  at  a  fixed  price,  so  that 
market  fluctuations  do  not  have  any  effect  on  the  keep- 
ing of  costs.  For  instance,  a  company  using  several 
thousands  of  tons  of  castings  per  year,  contract  for 
them  at  a  uniform  rate  per  pound,  delivered.  The  total 
weight  of  castings  entering  into  a  machine  times  the 
price  paid  per  pound,  obviously  gives  the  cost  of  the 
cast  iron  for  that  machine. 

The  steps  in  the  treatment  of  material  are  as  fol- 
lows: (1)  Purchase;  (2)  storage;  (3)  use;  (4)  record 
(of  all  preceding  acts  affecting  it). 

In  the  present  system  of  factory  organization  the 


Cost  of  Material 


COST  OF  MATERIAL  33 

« 

manager  is  the  one  from  whom  all  purchases  issue;  he 
is  the  nominal  purchaser.  As  has  been  mentioned  on  a 
preceding  page,  this  power  may  be  vested  in  a  specialist 
or  in  a  number  of  specialists,  who  have  more  skill  in 
buying  and  time  in  which  to  exercise  that  function  than 
the  manager. 

Purchased  material  either  goes  direct  to  the  store 
room  or  is  kept  track  of  by  the  storekeeper,  who  should 
be  able  to  show  by  his  records  the  receipt  of  material, 
issue  of  material,  and  balance  on  hand. 

Cost  of  Material  may  be  subdivided  as  follows : 
Material 
Freight 
Express 
L  Drayage 

The  elements  of  Freight,  Express  or  Drayage  are 
constituents  of  Cost  of  Material.  In  figuring  on  ma- 
terial the  cost  at  the  factory  is  first  taken,  to  it  is  added 
the  cost  of  laying  down  the  material  at  the  factory  door. 
There  may  be  either  freight  or  express  charges  and  also 
drayage  charges  at  one  or  both  ends  of  the  line. 

Transportation  charges  of  whatever  kind  on  raw 
material,  should  be  so  distributed  as  to  be  borne  pro- 
portionately by  the  material  incurring  the  expense.  If 
they  are  not  and  Freight,  Express  and  Drayage  are 
made  general  charges,  a  machine  may  be  put  out  bear- 
ing a  disproportionate  burden  of  such  charges  wrongly 
placed. 

By  stores  is  meant  those  supplies  including  raw 

3 


34  COST  OF  PRODUCTION 

material  kept  on  hand  for  use  in  a  business.  While  the 
stores  account  primarily  concerns  itself  with  the  raw 
material  used  in  a  business,  it  often  comprehends 
merchandise  chargeable,  not  as  Raw  Material  but  as 
Burden. 

The  matter  of  supervision  of  stores  depends  upon 
their  amount  and  value.  Where  the  material  used  con- 
sists mainly  of  pig  iron  or  heavy  castings, 
of  store"011  there  would  be  no  supervision  necessary 
to  prevent  loss  by  theft.  Where  a  miscel- 
laneous lot  of  finished  and  valuable  product  is  kept 
among  the  stores,  an  exact  system  showing  the  disposal 
of  every  piece  should  be  kept,  not  only  for  use  in  cost 
calculations  but  as  a  check  on  petty  thieving.  Brass 
castings  and  copper  material  are  particularly  liable  to 
this  form  of  "leakage." 

Stores  in  bulk  are  liable  to  a  fixed  percentage  of 
loss.  This  loss  is  ascertainable  by  experience  and 
should  be  considered — if  the  percentage  is  appreciable 
— in  store  room  and  cost  calculations. 

Material  once  received  by  the  store  room  can  not 
issue  without  authority.  This  authority  may  be  vested 
in  the  manager  or  foremen  of  various  departments  or 
any  intermediate  employed 

The  duties  of  the  storekeeper  are  to  receive  incom- 
ing goods,  verifying  same  by  invoice,  fill  such  requisi- 
tions for  stock  as  are  duly  authorized  and  keep  such 
account  of  stores  as  is  deemed  necessary  to  proper  busi- 
ness administration.    For  this  a  stores  ledger  may  be 


PRICE  OF  MATERIAL  35 

used,  being  simply  a  ledger  in  which  required  accounts 
are  opened,  keeping  a  record  of  incoming  and  outgoing 
stores. 

The  old  stores  ledger  is  fast  being  superseded  by 
some  form  of  card  system.  The  efficacy  of  card  systems 
as  a  means  of  saving  time  and  expense  is  well  recog- 
nized so  the  numerous  advantages  will  not  be  enumer- 
ated here. 

One  of  the  functions  of  cost  ledger  accounts  is  the 
charge  of  each  job  with  the  material  used,  exhibiting 
both  quantity  and  value.  In  case  a  product  is  made  in 
uniform  lots,  an  estimate  may  be  made  of  the  material 
used  in  a  standard  product  or  machine  and  the  job 
charged  with  a  proportionate  amount  according  to  the 
number  manufactured. 

An  attempt  to  follow  material  through  a  job  with 

regard  to  ordinary  fluctuation  in  market  price  is  not 

practical.    There  are  several  methods  in 

Fluctuation 

in  Price  of  use  to  determine  a  fixed  price  of  raw  ma- 

Material 

terial  to  be  used  in  a  machine.    One  is  to 

take  the  buying  price  and  consider  it  final,  the  reason 

for  this  being  given  that  the  buying  price  is  the  price 

that  concerns  the  manufacturer.     Another  method  is 

to  take  the  average  or  mean  price  for  a  term  of  years 

and  call  such  price  the  market  value.    The  argument 

advanced    for    this    method    is    that    a    machine    in 

process  of  construction  may  market  at  a  time  when  the 

raw  material  of  which  it  is  composed  is  either  higher  or 

lower  than  the  buying  price,  and  in  order  to  estimate 


36  COST  OF  PRODUCTION 

correctly  the  price  of  the  component  parts  of  the  ma- 
chine, a  mean  average  price  must  be  taken. 

Inflation  of  assets  in  business  must  be  guarded 
against,  even  in  the  case  of  material.  Such  inflation 
can  occur  by  writing  up  the  value  of  material  in  the 
storeroom  or  in  process  of  manufacture,  before  the 
finished  product  is  actually  sold,  or  by  assuming  the 
market  value  of  raw  material  to  be  its  original  cost  with 
the  addition  of  transportation  charges.  Transportaion 
charges  may  or  may  not  enhance  the  market  value  of 
raw  material.  The  factory  location  may  be  such  that 
the  market  value  of  the  material  would  not  equal  the 
cost  of  removal. 

An  apparent  profit  to  a  factory  may  be  shown  by 
the  general  factory  buying  from  a  branch  at  a  certain 
per  cent  above  cost  instead  of  debiting  to  Manufactured 
Stock  at  cost.  This  may  be  advisable  in  a  few  indi- 
vidual cases,  but  as  a  practice,  is  liable  to  be  a  mislead- 
ing one. 

In  a  works  having  several  branches  each  main- 
taining a  separate  stores  department,  the  following 
outline  of  procedure  is  one  followed  by  advantage  by 
many. 

The  head  of  each  department  makes  a  requisition 
to  the  head  office  for  all  stores  needed  in  his  division. 
This  requisition  issues  on  a  stated  date,  as  on  the  25th 
of  the  month,  on  the  1st  and  15th,  weekly,  or  oftener. 
Stores  are  not  allowed  to  get  beyond  a  certain  point, 
but  if  an  unexpected  demand  does  reduce  them    an 


REQUISITION  FOR  STORES  37 

emergency  requisition  is  issued.  All  requisitions  are 
turned  in  far  enough  ahead  to  allow  time  for  purchase 
by  the  head  stores  office,  in  case  they  are  low. 

Requisition  forms  may  be  as  simple  or  explicit  as 

the  needs  of  the  record  require,  but  usually  exhibit: 

(1)  Description  of  the  material  or  article; 

Kore.0"         (2)  quantity;  (3)  for  use  in ;  (4) 

when  needed ;  last  supply  obtained ; 

(5)  by  whom  supplied ;  (6)  remarks.  Such  requisition 
may  be  made  out  in  duplicate  or  triplicate,  and  the 
carbon  copy  may  be  checked  up  with  the  goods  when 
received.  These  goods  are  usually  invoiced  separately 
to  each  department  of  the  works,  as  delay  and  con- 
fusion may  result  from  the  sending  of  one  invoice  from 
department  to  department  for  the  checking  off  and 
verification  of  stores  received.  Should  the  checking  be 
done  at  the  head  office,  one  invoice  is  enough  as  the 
storekeeper,  on  receipt  of  the  goods,  checks  same  off 
with  his  duplicate,  and  if  found  correct,  sends  the 
requisition  number  with  his  O.  K.  to  the  head  office. 
Should  goods  not  be  as  ordered  or  otherwise  unsatis- 
factory, the  requisition  number  is  forwarded  with  no- 
tation of  rejection.  In  case  the  storekeeper  has  made 
out  his  requisition  in  triplicate,  the  first  sheet  will  be 
the  "Original,"  the  second,  the  "Advice,"  the  third  the 
"Voucher."  In  this  case  the  Advice  would  be  forwarded 
to  the  head  office  bearing  checks  and  notation,  such  an- 
notations having  been  duplicated  on  the  Voucher  by 
carbon  paper.    This  gives  the  head  office  a  receipt  from 


38  COST  OF  PRODUCTION 

the  storekeeper,  the  Advice  being  attached  to  the  Orig- 
inal as  a  receipt,  and  the  storekeeper  has  in  his  hands 
the  Voucher,  which  embraces  the  history  of  the  requi- 
sition from  the  time  it  is  made  out  until  the  goods  were 
received  by  him. 

If  a  stores  invoice  book  is  kept,  the  invoice  of  goods 
when  received  and  verified  will  be  entered  therein,  show- 
ing the  amount  of  invoice  as  received,  and  the  amount 
of  invoice  as  verified,  which  amount  is  posted  as  a 
credit  to  the  individual  firms,  and  as  a  debit  to  the 
commercial  ledger  under  General  Stores.  If  these 
amounts  are  to  be  analyzed  and  used  as  a  check  on  the 
departmental  stores  account,  the  ledger  is  so  ruled  as 
to  permit  each  department  or  works  to  have  a  separate 
column.  This  also  aids  in  the  tracing  of  errors  made 
in  keeping  of  the  different  works  books. 

Should  a  stores  received  book  be  kept  it  will  con- 
tain the  information  of  the  requisition  "Advice/'  and 
the  stores  ledger  folio.  From  this  is  posted  in  the  stores 
ledger  a  debit  to  the  specified  material  account. 

The  stores  departmental  ledger  closely  resembles 
the  commercial  ledger.  Instead  of  the  accounts  being 
with  individuals  they  are  with  specified  materials. 
Space  is  provided  for  such  information  as  necessary, 
as  description,  rate  and  amount  of  goods.  In  addition, 
the  debit  side  should  have  a  space  for  the  firm  name  of 
the  house  supplying  the  stores. 

Orders  for  stores  are  made  out  in  duplicate  by  the 
one  authorized — usually  the  foreman  or  departmental 


DIVERTED  STORES  39 

manager,  the  original  going  to  the  storekeeper,  the 
duplicate  being  retained  by  the  one  ordering.  When 
issued,  the  stores  are  receipted  for  on  the  original  order, 
which  becomes  a  voucher  for  their  issue.  The  stores 
order  may  be  as  explicit  as  desired,  usually  exhibiting 
in  detail  the  contemplated  disposal  of  the  stores, 
whether  called  for  in  the  regular  process  of  manufac- 
ture, for  works  order  No.  — ,  for  maintenance  of  plant. 
•r  for  other  purposes. 

In  case  stores  ordered  and  supplied  are  diverted 
from  their  original  purpose,  the  one  ordering  such 
stores  gives  a  detailed  notification  to  the 
stores  ^  storekeeper  that  he  may  credit  the  debited 

account,  and  place  the  debit  where  it 
properly  belongs.  This  may  occur  on  a  special  or  rush 
order,  when  the  machines  use  the  material  already  at 
hand  for  another  order,  and  if  not  properly  reported 
will  show  a  low  material  record  for  the  rush  or  special 
job  and  a  correspondingly  high  material  record  for  the 
job  from  which  the  material  was  taken.  This,  too,  is 
liable  to  happen  where  stores  are  ordered  in  excess  of 
need  for  jobs,  or  where  an  estimate  has  allowed  for 
more  material  than  is  needed.  The  rule  should  be  that 
surplus  of  any  kind  should  be  returned  to  the  store- 
room, as  well  as  diverted  material  reported  for  proper 
charge. 

Scrap  reported  from  a  job  may  be  treated  in  var- 
ious ways.  A  satisfactory  way  is  as  follows:  When  a 
large  amount  of  scrap  is  handled  it  may  be  considered 


40  COST  OF  PEODUCTION 

in  bulk  and  pro  rated  to  the  material  from  which  it 
came.  Such  credit  would  be  the  amount  which  the 
scrap  brought  on  sale.  If  not  sold  but  held  for  sale, 
a  fair  price  would  be  taken,  being  the  mean  market 
price.  If  returned  to  the  works  for  remelting  or  other 
use  it  would  be  considered  worth  the  scrap  price,  plus 
the  charges  necessary  to  lay  it  down  for  use  at  the 
factory. 

In  concluding  the  chapter  on  Material,  it  may  be 
said  that  the  question  of  interest  to  the  manufacturer 
is,  whether  or  not  his  business  is  large  enough  to  de- 
mand an  accurate  record  of  stores.  It  would  seem  that 
it  is  no  more  advisable  to  leave  stores  about  without  a 
check,  than  it  would  be  to  leave  money  lying  about 
loose,  and  subject  to  no  record.  Stores  are  not  only 
liable  to  misappropriation,  but  to  misuse  and  deprecia- 
tion, and  should  be  subjected  to  as  careful  supervision 
in  their  purchase,  issue,  and  use  as  every  department 
of  factory  expenditure. 


CHAPTER     VI 

LABOR 

The  greatest  cost  of  production  is  labor,  and  the 

more  complex  the  product  the  greater  is  this  cost. 

The  first  cost  of  anything  is  its  labor  cost, 

Price  Consid- 
ered as  Cumuia-   and  the  cost  of  a  thing  at  the  present  time 
tive  Labor  Cost     ,  ■  ,    .      _     .         lia.  ... 

is,  from  one  point  of  view,  the  cumulative 

cost  of  the  labor  spent  to  produce  that  thing  from  the 

raw  material.     Every  manufactured  product  existing 

to-day  was  at  one  time  raw  material  and  only  by  the 

exercise  of  labor  has  it  become  what  it  now  is.    On  a 

preceding  page  has  been  given  an  illustration  of  the 

savage  picking  up  native  gold  from  the  bank  of  a  river  at 

the  sole  cost  of  labor.    When  he  desires  anything,  it  is 

to  be  had  at  the  direct  or  indirect  expense  of  labor. 

Labor  cost  first  enters  into  the  price  he  has  to  pay  for 

everything,  and  as  all  values  spring  from  labor,  burden 

charges  can  not  arise  until  labor  has  purchased  that 

which  bears  the  burden. 

While  methods  of  hiring  labor  and  keeping  a  record 

of  the  individual  employe'  may  be  said  to  fall  within  the 

subject  of  factory  organization  and  management  and 

without  the  science  of  costs,  yet  a  correct  record  of 

labor  necessary  in  costs,  can  not  be  kept  without  a 

minute  record  of  the  employed     There  are  employers 

who  require  a  detailed  application  blank,  with  informa- 

41 


42  COST  OF  PRODUCTION 

lion  sworn  to,  with  vouchers  signed  by  one  or  more  per- 
sons knowing  the  employe',  this  application  constituting 
a  part  of  the  employer's  records.  On  the  other  hand, 
many  factories  entrust  the  hiring,  supervision,  and  dis- 
charge of  all  shop  employe's  to  the  foreman,  who  usually 
keeps  no  record — or  a  very  imperfect  one — of  the  em- 
ploye's under  him. 

Inasmuch  as  direct  labor  constitutes  from  forty  to 
fifty  per  cent  of  the  cost  to  produce,  and  is  subject  to 
waste  the  same  as  any  factor  of  costs,  it  requires  no 
argument  to  show  that  the  most  complete  records 
should  exhibit  what  disposal  is  made  of  every  cent  paid 
out  for  labor.  A  manager  may  know  that  waste  is 
taking  place,  and  only  an  accurate  record  will  show,  for 
instance,  that  the  cost  of  assembling  is  too  large,  which 
overcharge  may  be  remedied  by  a  rearrangement  of  the 
plan  of  the  factory,  if  conditions  are  such  that  it  would 
be  a  paying  step. 

The  detailed  employe*  record  affects  the  cost  record 
only  indirectly,  but  at  times  in  a  very  essential  manner. 
There  should  be  always  on  file,  in  an  alphabetic  card 
index  a  complete  list  of  employes,  this  list  to  show  the 
following  data :  (1)  Name;  (2)  department;  (3)  num- 
ber; (4)  formerly  employed  by ;  (5)  address; 

(6)  engaged  by ;  (7)  date;  (8)  occupation; 

(9)  rating. 

The  foregoing  data  is  self-explanatory,  with  the 
exception  of  division  9,  rating,  which  means  more  than 
apparent   on   the   surface.     The   obvious  or   nominal 


RATING  OF  EMPLOYES  43 

rating  should  be  a  colorless  one ;  as,  "Recommended  by 
Perry  &  Sehafer;"  "Ransom  Bros.  &  Co.  say  good  man," 
etc.,  but  each  indorsement  should  be  merely  harmless  in- 
formation and  such  that  when  made  public  or  taken  in 
court  would  not  prejudice  anyone  to  whose  knowledge 
such  information  came.  But  the  employees  number  or 
some  other  symbol  should  refer  to  a  private  information 
record  kept  under  the  supervision  of  the  manager  and 
seen  only  by  him  and  a  trusted  assistant.  The  em- 
ployer, to  a  certain  extent,  invests  his  money  in  his 
employe's,  and  is  entitled  to  their  working  history,  as  a 
guide,  not  only  to  their  being  engaged,  but  to  their  re- 
tention, promotion,  and  subsequent  history  with  the 
firm.  On  the  other  hand,  the  competent  employe',  who 
has  taken  care  to  make  his  working  history  always  a 
good  one,  and  labored  faithfully  to  maintain  a  high 
efficiency  record,  is  entitled  to  the  benefits  accruing 
from  such  a  record.  The  incompetent,  dissipated,  or 
shirking  workman  is  often  employed — particularly  on  a 
recommend — but  his  efficiency  record  will  soon  show 
him  up  and  give  him  only  that  treatment  which  is  due. 

There  is  no  argument  needed  to  show  that  all  real 
records  of  this  character  should  be  secret,  as  much 
damage  may  be  done  by  even  the  smallest  "leak"  in 
private  information  of  this  kind. 

The  first  point  to  be  considered  in  a  system  of 
costs  is  the  accurate  recording  of  the  employees  time. 
The  systems  used  for  this  purpose  are  described  in  de- 
tail in  Part  II  of  this  book.    The  check  or  tally  system 


44  COST  OF  PKODUCTION 

— now  being  fast  superseded — is  one  to  which  many 
manufacturing  plants  otherwise  modern  in  equipment, 
still  retain.    This  system  is  as  follows : 

The  workman  enters  works  through  the  time  office. 

Each  employe'  has  a  number  by  which  he  is  designated, 

which  number  he  calls  out  on  entering,  the  timekeeper 

giving  him  a  check  bearing  the  number 

The  Tally  ° 

System  called.    The  works  gate  is  guarded  by  a 

Described 

turnstile,  and  once  in  the  workman  can 

not  leave  without  passing  through  this  or  some  other 
exit  where  his  leaving  would  be  noticed.  This  is  used 
as  a  means  to  prevent  "doubling,"  as  otherwise  a  work- 
man might  call  out  a  confederate's  number  and  secure 
an  extra  check,  and  so  lead  to  an  improper  credit  for 
an  employ^  not  working.  If  the  employe's  or  any  of 
their  number  leave  at  noon,  the  checks  are  given  in  at 
the  time  office,  and  again  handed  them  at  12:30  or 
whenever  they  return,  if  the  workmen  take  their  noon 
inside  the  works,  their  check  would  not  be  turned  in 
until  leaving  time. 

The  checks  or  tallies  given  out  in  this  system,  are 
racked  on  hooks  numbered  to  correspond  to  the  tallies. 
Absence  of  a  check  from  a  hook  therefore  shows  that 
the  employe'  bearing  the  corresponding  number  is  at 
work,  and  an  entry  on  the  time-book  or  record  is  made 
accordingly.  Workmen  coming  late  have  a  "late  check" 
hung  on  their  hook  bearing  a  notation  as  to  time  lost, 
or  this  notation  may  be  entered  at  once  on  the  time- 
record. 


SYSTEMS  OF  WAGE  PAYMENTS  45 

The  time-record  is  posted  at  once  and  may  be  veri- 
fied by  the  timekeeper,  who  visits  the  factory,  checking 
each  department  for  number  of  workmen,  or  the  fore- 
men may  turn  in  such  record,  or  a  combination  of  both 
methods  may  be  used. 

The  check  or  tally  system  possesses  many  disad- 
vantages, but  is  often  retained  because  of  mere  inertia, 
having  been  installed  and  worked  satisfactorily  for  a 
long  time  it  is  kept  in  operation.  This  system  is  open 
to  many  objections,  the  principal  ones'  being  on  the 
score  of  economy  and  accuracy.  An  automatic  recorder 
of  whatever  kind  dispenses  with  one  or  more  employe's, 
and  is  not  subject  to  error,  as  are  personal  entries.  The 
various  kinds  of  time  recorders  are  in  common  use  and 
extensively  advertised  by  the  technical  press 

The  various  methods  of  paying  the  workman  have 
a  direct  and  important  bearing  on  production  costs.  It 
is  admitted  unqualifiedly  that  all  tendencies  of  the 
average  workman  are  toward  restriction  of  output. 
There  are  two  main  reasons  for  this:  (1)  The  wish  to 
receive  as  much  as  possible  for  the  least  possible  work ; 
(2)  the  theory  that  work  must  not  be  done  as  quickly  as 
possible  as  it  might  throw  the  worker  out  of  a  job,  or 
throw  other  workers  in  the  same  line  out  of  employ,  and 
so  tend  to  a  lowering  of  wages  in  that  particular  trade. 

The  systems  of  wage  payment  now  in  use  are  the 
daily  wage  system  or  day's- work  plan;  the  piece-work 
plan;  the  premium  plan,  the  bonus  system,  and  the 
profit-sharing  system,  and  various  modifications  of  the 


46  COST  OF  PRODUCTION 

foregoing.    A  detailed  discussion  of  the  relative  merits 
of  these  plans  would  be  so  long  as  to  be  without  the 

scope  of  this  work,  but  the  principles  of 
fS?s  eacl1  system  wil1  t>e  taken  up  following — 

their  application  depending,  of  course, 
upon  circumstances.  Whatever  system  reduces  the  price 
of  labor — increases  the  output  of  the  employe" — is  the 
one  to  be  used  and  each  have  their  advocates.  In  many 
cases  it  is  not  the  system  but  the  man,  That  is  to  say, 
an  engineer  of  years'  practical  experience  studies  the 
various  conditions  surrounding  labor  as  he  knows  it 
from  personal  contact.  Being  a  broad  and  essentially 
practical  man,  he  is  able  to  install  and  operate  a  sys- 
tem, which,  peculiarly  fitted  to  the  existing  conditions, 
cuts  down  expense  by  a  substantial  percentage.  Another 
man  under  different  circumstances  would  make  an  en- 
tire failure  of  the  same  system.  However,  there  are 
underlying  principles  broad  enough  on  which  to  build, 
which,  if  taken  as  a  basis,  form  the  essentials  of  a  sys- 
tem no  matter  what  the  circumstances. 

It  is  not  necessary  to  trace  the  causes  which  have 
led  up  to  the  indifference  shown  by  day  workers.  There 
is  a  minimum  inducement  only  for  a  day  worker  to  do 
his  best.  To  do  only  enough  to  escape  being  discharged 
is  more  often  the  aim  than  to  do  a  just  day's  work.  No 
matter  how  often  any  attempt  may  be  made  to  equalize 
men  and  put  them  on  an  equal  footing,  the  fact  still  re- 
mains that  a  very  great  difference  exists — and  always 
will  exist  in  both  the  quality  and  quantity  of  work  done 


THE  DAY'S- WORK  PLAN  47 

by  different  men.    Daily  wages  and  equal  pay  assumes 

them  to  be  on  an  equal  footing,  and  such  not  being  the 

case,  is  manifestly  unfair  to  some.     Either  some  are 

underpaid  or  overpaid,  and  in  either  case  the  remainder 

are  discriminated  against. 

In  the  day's-work  plan,  the  employe*  is  paid  for  the 

time  which  he  spends  upon  his  work.    As  a  result  of 

this  system,  an  easy-going  rate  of  speed  is 
The 

Day's-Work  generally  taken,  marked  by  occasional 
Plan 

spurts;  workmen  have  little  interest  in 

the  work,  for  which  the  employer  overpays.  The  fore- 
going facts  are  admittedly  true,  and  yet  the  percentage 
of  manufacturing  plants  employing  this  plan  is  large — 
very  large — when  compared  with  what  it  should  be.  It 
is  no  small  undertaking  to  reorganize  a  large  factory 
and  secure  the  cooperation  of  the  workers  to  a  success- 
ful finish,  yet  the  returns  are  so  great  and  the  experi- 
ence gained  so  valuable,  that  no  manufacturer  should 
hesitate  to  make  the  change,  gradually  if  necessary, 
but  at  any  rate,  get  away  from  as  wasteful  a  form  of 
production  as  the  day's-work  plan  of  employing  labor. 

The  theory  of  piece-work  is  a  simple  one.  With  the 
piece-work  plan  in  operation  the  workman  is  paid  for 
kis  work,  proportionate  to  the  amount  done.  A  definite 
price  for  each  job  being  set,  the  workman  who  contrives 
either  by  working  harder  or  by  the  use  of  better 
methods  to  shorten  the  time  of  manufacture,  conse- 
quently earns  a  proportionately  greater  amount. 

This  system,  on  its  face,  seems  to  be  based  upon 


48  COST  OF  PRODUCTION 

scientific  principles  and  to  be  fair  to  both  employer  and 
employe'.  That  it  does  not  work  well  in  practice  and 
fails  to  yield  the  desired  results  is  evident  from  an  in- 
vestigation of  a  large  number  of  shops  in  which  it  is 
or  has  been  employed.  Following  is  an  outline  of  a 
change  from  the  day's  work  plan  to  piece  work  as  it 
often  results  in  practice. 

The  employer  investigates  or  can  not  help  observ- 
ing that  his  output  is  not  what  it  should  be  while  pay- 
ing his  help  by  the  day,  and  a  system  of  payment  by  the 
piece  is  installed.  Suppose  the  labor  price  of  a  standard 
piece  of  work  to  be  ten  dollars.  The  employer  satisfies 
himself  that  this  piece  could  be  produced  for  eight  dol- 
institution  and  l&rs  labor  cost.  To  give  the  workman  an 
7iel^WoTkthe  incentive  for  faster  work,  a  piece-work 
Plan  price  of  nine  dollars  is  made,  this  making 

in  fact,  a  division  of  the  profitable  saving,  with  the 
workman.  The  first  objection  usually  comes  from  the 
workman,  who  fears  that  he  is  being  taken  advantage 
of,  and  is  certain  he  can  not  make  wages  at  the  price 
per  piece  offered  him.  Conditions  being  favorable  and 
perhaps  being  fortified  temporarily  by  a  minimum 
guarantee,  he  starts  in  and  increases  his  output  much 
more  than  the  per  cent  figured  on  the  job  with  the  re- 
sult that  his  earnings  increase  with  such  rapidity  that 
the  profit  to  the  employer  is  swallowed  up.  The  logical 
result  is  a  cut  in  wages.  The  employe"  thereupon  figures 
that  too  much  work  done  and  too  large  a  consequent 
wage  results  in  a  cut.    He  therefore  assures  himself 


DRAWBACKS  OF  THE  PIECE-WORK  PLAN   49 

what  is  the  maximum  wage  he  can  receive  without  a 
cut,  and  never  increases  his  output  beyond  that  point. 
The  situation  at  this  point  between  the  employer  and 
the  employe*  is  this:  The  former  uses  every  possible 
means  to  increase  the  output  that  he  may  profit  by  more 
work  without  increased  burden  expense — the  men  so 
time  their  work  that  they  are  in  no  danger  of  a  cut  be- 
cause of  large  wages.  The  interests  of  the  employer 
and  the  men  are  diametrically  opposed,  with  the  result 
that  the  object  in  view — reduction  of  cost — is  not  at- 
tained. 

Another  and  important  drawback  connected  with 
the  piece-work  plan  grows  out  of  the  fact  that  an  accur- 
ate standard — especially  on  varied  or  complicated  work 
is  difficult  to  set.  This  was  shown  by  Fred  W.  Taylor, 
of  the  American  Society  of  Mechanical  Engineers,  in  a 
paper  presented  before  that  body  at  Detroit  in  1895. 
Mr.  Taylor  said: 

"Every  intelligent  workman  realizes  the  import- 
ance, to  his  own  interest,  in  starting  on  each  new  job 
as  slowly  as  possible.  There  are  few  foremen  or  super- 
intendents who  have  anything  but  a  general  idea  as  to 
how  long  it  should  take  to  do  a  piece  of  work  that  is 
new  to  them.  Therefore,  before  fixing  a  piece-work 
price  they  prefer  to  have  the  job  done  for  the  first  time 
by  the  day.  They  watch  the  progress  of  the  work  as 
closely  as  their  other  duties  will  permit,  and  make  up 
their  minds  how  quickly  it  can  be  done.  It  becomes  the 
workman's  interest  then  to  go  just  as  slowly  as  pos- 

4 


50  COST  OF  PRODUCTION 

sible,  and  still  convince  his  foreman  that  he  is  working 
well. 

''The  extent  to  which,  even  in  our  largest  and  best 
managed  establishments,  this  plan  of  holding  back  on 
the  work — 'marking  time/  or  'soldiering/  as  it  is  called 
— is  carried  on  by  the  men,  can  scarcely  be  understood 
by  one  who  has  not  worked  among  them.  It  is  by  no 
means  uncommon  for  men  to  work  at  the  rate  of  one- 
third,  or  even  one-quarter,  their  maximum  speed,  and 
still  preserve  the  appearance  of  working  hard.  And 
when  a  rate  has  once  been  fixed  on  such  a  false  basis, 
it  is  easy  for  the  men  to  nurse  successfully  'a  soft  snap' 
of  this  sort  through  a  term  of  years,  earning  in  the 
meanwhile  just  as  much  wages  as  they  think  they  can 
without  having  the  rate  cut." 

It  is  plainly  evident  that  the  success  of  piece  work 
depends  upon  the  fairness  of  the  schedule  of  prices, 
the  subsequent  change  in  those  prices  and  managerial 
ability  of  the  foreman  or  supervision  of  the  shop.  If 
the  time  a  job  ought  to  take  is  accurately  figured  and 
the  workman  is  given  an  equitable  price — large  enough 
to  be  made  a  real  incentive — and  a  competent  manage- 
ment is  in  charge,  the  defects  of  a  piece-work  system  are 
forestalled  or  minified  and  a  corresponding  saving  i» 
effected  over  day  labor. 

There  are  two  methods  of  figuring  the  probable 
time  on  a  job.  The  first  is  by  averaging  the  time  of  a 
number  of  similar  jobs  performed  under  the  same  con- 


PROBABLE  TIME  51 

ditions.  This  method  presents  the  advantage,  that  it 
actually  shows  what  has  been  accomplished  in  the  past, 
and  as  such  is  a  guide  to  future  production.  The  dis- 
_       .     .        advantage — and  it  is  held  by  many  to  be 

Methods  of 

Figuring  a  great  one1 — is  that  it  is  impossible  to 

Probable  Time 

judge  what  per  cent  of  the  time  charged 
against  the  job  was  spent  by  the  employe'  in  "soldier- 
ing." It  is  usual,  too,  that  little  or  no  effort  is  made 
to  classify  the  operations  necessary  to  perform  the 
work,  and  that  the  result  is  more  or  less  the  nature  of 
a  guess — according  as  past  records  show  a  number  of 
jobs  similar  to  the  one  under  consideration  or  not.  A 
method  in  successful  use  is  one  in  which  a  job  is  re- 
solved into  its  component  elements,  and  the  quickest 
time  ascertained  in  which  these  elementary  operations 
can  be  performed.  These  operations  can  be  classified, 
tabulated  and  arranged  and  used  as  desired  in  the 
fixing  of  rates,  and  modified  as  experience  shows  is 
necessary.  The  second  method  is  that  of  paying  no  at- 
tention to  what  has  been  done  or  what  is  actually  being 
accomplished  and  disregarding  former  practices  en- 
tirely. The  probable  time,  therefore,  must  be  figured  by 
one  who  is  thoroughly  competent  to  judge  of  all  the 
conditions,  for  on  him  depends  the  success  of  the  plan. 
Such  knowledge  can  come  only  from  practical  experi- 
ence and  a  highly  developed  sense  of  the  possibilities 
of  labor. 

In  proving  that  wastes  now  going  on  are  absurd, 


52  COST  OF  PRODUCTION 

and  in  direct  line  with  the  second  method  outlined  in 
the  paragraph  above,  Harrington  Emerson  says  in  the 
Railroad  Gazette: 

"As  an  example  of  old  practice  against  new,  I  hold 
in  my  hands  the  original  figures  of  the  skilled  and  com- 
petent engineer  of  a  large  shop,  who  estimated  the  cost 
of  a  certain  job  at  $4,575,  of  which  $3,300  was  for  ma- 
terials and  $1,275  for  labor.  The  work  came  under  my 
direction  after  it  was  one-third  completed,  and  was 
pulled  off  with  four  men  in  three  months  for  a  total 
cost  of  $3,375.09,  of  which  $622.79  for  labor,  netting  a 
profit  of  $1,824.91,  instead  of  $629,  as  estimated— 
nearly  three  for  one,  yet  some  of  the  men  on  that  job 
were  paid  a  bonus  [increase]  of  nearly  100  per  cent 
above  their  regular  wages.  I  also  hold  a  routing  card 
of  one  of  my  assistants,  Mr.  Parkhurst,  in  which  a  car- 
shop  job,  marking  and  moving  200  pieces  of  oak,  was 
estimated  by  the  foreman  to  require  two  days,  but  was 
actually  completed  in  two  hours  twenty-five  minutes  on 
a  fifty  per  cent  bonus  basis." 

The  system  above  referred  to  is  a  modified  piece- 
work system,  known  as  the  differential  system,  differing 
from  ordinary  piece  work  in  that  the  premium  paid  is 
higher — often  100  per  cent — and  the  reward  is  with- 
held unless  the  maximum  of  production  is  reached.  A 
more  exact  definition  of.  the  differential  rate  system  of 
piece  work,  is  that  system  which  pays  the  employe*  "a 
higher  price  per  piece,  or  per  unit,  or  per  job,  if  the 
work  is  done  in  the  shortest  possible  time,  and  without 


THE  PREMIUM  PLAN  53 

imperfections,  than  is  paid  if  the  work  takes  a  longer 
time  or  is  imperfectly  done." 

The  premium  plan  of  wage  payment  is  as  follows : 

The  workman  is  paid  over  and  above  his  usual  daily 

wages,  a  premium  for  every  hour  he  suc- 

Premium  ceeds  in  reducing  a  previously  determined 

Flan 

time,  such  premium  being  divided  between 
the  workman  and  the  employer  in  a  definite  ratio.  The 
time  used  as  a  standard  is  determined  from  previous 
costs.  The  effect  of  this  system  is  to  pay  the  workman 
for  saving  time,  and  has  as  its  basic  principle  the 
making  of  the  hourly  premium  less  than  the  hourly 
wages. 

The  premium  rate  is  obviously  the  important  part 
of  this  system.  No  hard  and  fast  rule  can  be  laid  down 
as  to  what  premium  should  be  paid,  as  it  would  vary 
greatly  with  different  lines  of  production,  and  in  the 
same  lines  under  different  circumstances.  If  a  small 
premium  is  offered  the  employe'  may  not  put  forth  the 
effort  necessary  to  earn  it,  or  if  he  does,  not  steadily 
or  systematically.  This  will  defeat  the  object  of  the 
system  by  not  increasing  production.  If  too  large  a 
premium  be  offered,  the  cost  of  production  will  be  dis- 
proportionate increased.  A  cut  of  premium  is  to  be 
much  avoided  as  in  the  piece-work  plan,  as  it  will  lead 
to  the  same  results.  In  a  perfect  working  system  the 
earnings  of  the  employe*  will  be  limited  only  by  his 
power  of  production,  and  the  results  to  the  employer 
will  be  an  increase  of  output  and  decrease  of  labor  cost. 


54  COST  OF  PRODUCTION 

The  bonus  system  of  wage  paying  was  first  pro- 
mulgated in  1901.     In  this  system  a  detailed  card  is 
made  out  showing  the  various  elementary  operations 
making  up  a  piece  of  work.    There  is  also 
Bonus  shown   the   tools   needed   and   the   time 

System 

necessary  for  each  operation.  These  times 
have  been  previously  determined  and  tabulated  as  de- 
scribed on  a  preceding  page,  there  being  no  operation  in 
the  shop  not  a  combination  of  these  elements.  The 
total  time  allotted  on  a  job  of  work  is  obviously  the 
sum  of  its  elementary  operations.  If  a  workman  is 
unable  to  perform  his  job  of  work  in  the  allotted  time, 
he  is  paid  at  the  day  rate  only ;  if  he  performs  the  work 
as  laid  out,  according  to  the  specification  and  within 
the  time  limit,  he  receives  in  addition  to  the  day  rate  a 
definite  bonus. 

The  instruction  cards  are  and  must  be  made  out 
by  one  thoroughly  familiar  with  the  operations  and  the 
records,  and  as  so  made  they  are  a  guide  to  the  best 
method  by  which  the  work  can  be  done.  The  ordinary 
worker,  in  all  probability,  would  not  plan  out  his  work 
nor  would  he  execute  it  even  approximately  as  well  as 
he  will  from  his  detailed  guide  card.  Continuous  work- 
ing by  the  right  methods  tends  to  make  him  a  better 
workman  and  the  entire  trend  of  the  employees  methods 
under  this  system  is  towards  better  execution  as  well 
as  greater  output. 

The  principal  advantage  of  the  bonus  system  over 


THE  PROFIT-SHARING  PLAN  55 

the  ordinary  piece-work  system  lies  in  the  fact  that  it 
has  a  minimum  wage  and  avoids  the  difficulty  found 
in  piece  work — that  of  securing  an  equitable  rate.  If 
proper  piece  rates  could  be  made,  thus  avoiding  the 
necessity  of  a  cut,  the  piece-rate  system  would  be  pre- 
ferable, but  such  rates  are  very  difficult  to  determine 
and  often  can  only  be  found  by  "cutting  and  fitting" 
until  suitable  rates  are  thus  obtained. 

The  difficulties  in  the  way  of  providing  suitable 
instruction  cards  are  considerable,  requiring  a  vast 
amount  of  practical  information  rarely  possessed  by 
one  man.  As  the  instruction  cards  take  up  processes 
in  detail,  if  one  of  the  operations  is  wrongly  timed  it 
can  be  modified  as  needed,  but  if  any  material  error  is 
often  made  it  will  cause  the  workmen  to  doubt  the  en- 
tire system,  which  result  can  not  fail  to  be  harmful  in 
its  result.  As  a  result,  the  entire  success  of  the  plan 
hinges  on  the  accuracy  with  which  the  cards  are  made 
out. 

The  profit-sharing  plan  of  wage  payment  is  one  in 

which  the  employe'  receives  a  certain  percentage  of  the 

final  business  profits  in  addition  to  his 
The  Profit- 
Sharing  regular  wages.     This  system  is  open  to 

many  and  serious  objections,  some  which 

are  as  follows :   Anything  given  the  employe*  under  the 

profit  sharing  plan  is  not  in  the  nature  of  earning  but 

in  the  nature  of  a  gift,  being  in  fact,  a  sum  that  is  in 

no  way  earned  by  him.    Profit  earned  by  a  company 


56  COST  OF  PRODUCTION 

may  be  due  to  the  superior  management  of  one  man  or 
come  from  the  superior  efficiency  of  the  sales  force,  or 
from  one  of  a  hundred  other  causes. 

Another  prime  objection  is  the  one  urged  against 
the  day  wage  system,  viz.,  that  it  rewards  the  lazy  em- 
ploye' with  the  energetic,  the  poor  with  the  good,  as  all 
receive  an  equal  or  proportionate  share  of  the  profits. 
Then,  too,  the  rewards  are  not  immediate  but  remote, 
and  the  effect  of  a  future  dividend  upon  any  but  the 
most  sanguine  is  questionable. 

The  workmen  must  accept  on  trust,  the  statement 
that  the  dividend  is  correct.  They  have  no  direct  means 
of  verifying  it,  as  the  means  by  which  the  result  was 
obtained  is  so  complicated  that  few  could  form  any 
idea  as  to  whether  or  not  the  announced  profit  was  just 
or  reduced  by  judicious  "watering"  of  stock. 

The  term  "profit-sharing"  implies  a  profit.  In  case 
a  plant  were  run  at  a  loss,  there  is  no  provision  for  an 
assessment,  and  it  would  be  impracticable  were  there 
such  a  provision,  as  the  indirect  loss  made  by  assessing 
the  workmen  would  offset  the  money  collected  in.  In 
a  term  of  ten  years,  it  is  fair  to  assume  that  one  or 
more  "lean"  years  may  be  met,  and  under  this  system 
there  is  no  provision  therefor. 

Among  the  successful  methods  of  getting  the  em- 
ploye* to  take  an  interest  in  the  business  is  by  making 
him  a  stockholder.  He  then  not  only  "plugs"  for  the 
business,  but,  having  a  proprietary  interest  in  the  com- 
pany, tries  at  all  times  to  further  their  interest  both 


INTERESTING  THE  EMPLOY^  57 

in  the  shop  or  out.  The  ratio  of  success  by  this  method 
may  be  said  to  decrease  directly  with  the  size  of  the 
company,  as  the  smaller  the  company  the  greater  one 
man's  influence  on  its  future. 

In  the  foregoing  discussion  of  the  various  wage 
systems  one  element  has  not  been  touched  upon — the 
relation  of  burden  generally,  or  depreciation  specifi- 
cally, to  output.  This  will  be  taken  up  in  the  chapter  on 
Depreciation. 


CHAPTER    VII 

BURDEN 

The  second  factor  composing  Factory  Cost  is 
Burden,  often  called  Fixed  Charges.  This  brings  in 
the  first  inexact  factor  in  the  science  of  costs,  and  the 
science  is  mainly  concerned  with,  (1)  Determination  of 
Burden;   (2)  apportionment  of  Burden. 

As  previously  shown,  the  constituent  elements  of 
Burden  are  as  follows: 

1.  Indirect  Labor 

2.  Heating,  Lighting  and  Rent  of 
Building 

Burden  i  3.  Taxes 

4.  Insurance 

5.  Depreciation 

6.  Upkeep 

The  determination  of  these  various  elements  is  not 
a  difficult  process  and  may  be  arrived  at  with  a  fair 
degree  of  accuracy — the  amounts  determined  being 
accurate  enough  for  all  practical  purposes,  the  sum  of 
the  elements  giving  the  total  Burden. 

In  the  apportionment  of  Burden,  the  difficulty 
arises  as  to  how  this  factor  shall  be  distributed  and 
charged  against  the  made  or  manufactured  product. 

If  we  assume  Burden  =  6,  and  product  —  p,  then 

b 

-  =  amount  Burden  borne  by  unit  product. 

P 

58 


BURDEN  AND  ITS  APPORTIONMENT       59 

But  p  is  made  up  of  different  and  complexly  vary- 
ing factors,  and  there  is  not  nor  can  there  be  any  as- 
surance that  when  p  is  resolved  into  those  factors  that 
6  can  be  correctly  apportioned. 

If  we  take  as  a  concrete  example  a  factory  pro- 
ducing 1,000  machines  in  one  month,  and  assume  that 
each  machine  goes  through  exactly  the  same  process, 
and  that  the  burden  for  that  time  was  $2,000,  then  it 
is  an  easy  matter  to  determine  that  the  burden  that 
each  machine  should  carry  should  be  $2,000-^-1,000, 
the  number  of  machines  =  $2,  the  amount  of  burden 
that  each  should  carry. 

But  if  the  conditions  remain  the  same  with  the 
exception  that  the  machines  turned  out  are  different, 
each  going  through  an  individual  process,  it  is  with- 
out the  scope  of  practical  business  possibility  to  ap- 
portion the  burden  so  that  it  will  be  borne  equitably 
by  each  machine. 

What  can  be  done  is  this:  Burden  may  be  so  ap- 
portioned that  it  is  all  charged  off — each  machine  bear- 
ing some  of  the  expense,  as  determined  by  some  method 
of  apportionment. 

There  are  three  principal  methods  of  apportion- 
ment, the  percentage  burden  plan,  the  hourly  burden 
plan  and  the  machine-rate  plan.  There  are  many  other 
methods,  for  the  most  part  modifications  of  these,  but 
the  two  first  are  in  most  common  use. 

Both  the  percentage  burden  plan  and  the  hourly 
burden  plan  have  the  warmest  advocates,  and  much 


60  COST  OF  PRODUCTION 

has  been  written  in  defense  of  each  system — writers 
often  seeing  no  other  merit  in  any  other  plan  than  the 
one  they  set  out  to  defend. 

The  percentage  burden  plan  is  the  one  usually  em- 
ployed when  it  is  attempted  to  distribute  the  indirect 

burden  expense  over  the  work.    There  is 
The  Percent- 
age-Burden        necessary   to   compute  this  distribution: 
Plan 

(1)  Burden;  (2)  amount  expended  for 
direct  labor  in  a  given  period  of  time  or  on  a  given 
job.  The  ratio  existing  between  (1)  and  (2)  gives  the 
percentage  by  which  the  direct  wages  is  multiplied,  the 
product  giving  the  burden  which  that  particular  work 
should  bear.  This  is  a  very  simple  method,  and  one 
that  can  hardly  be  called  exact.  By  this  method,  a 
shop  putting  out  work  uniform  or  nearly  so  in  product, 
and  having  a  wage  scale  not  greatly  diversified,  finds 
it  accurate  enough  for  practical  purposes. 

Where  this  method  falls  short,  however,  is  in  the 
shop  radically  differing  in  conditions  from  the  one 
noted  above.  If  the  working  machines  vary  greatly  in 
identity,  the  wage  scale  is  not  uniform  because  of 
varying  prices  paid  labor,  and  the  component  parts  of 
the  manufactured  product  are  varied  in  material  and 
price — when  these  conditions  are  present,  the  percent- 
age-burden plan  is  not  accurate  enough  to  meet  the  re- 
quirements of  a  cost  system. 

Three  of  the  elements  of  Burden  are  Taxes,  In- 
surance and  Depreciation.  These  are  chargeable — not 
against    the    workman — but   against    the    factory    in 


HOURLY-BURDEN  PLAN  61 

which  he  works  and  the  machine  which  he  runs.  But 
by  the  percentage  burden  plan,  as  part  of  Burden  they 
are  charged  against  direct  labor.  That  is,  a  one-dollar 
man  running  a  thousand-dollar  machine  is  charged 
only  one-fifth  as  much  as  a  five-dollar  man  working  at 
a  job  where  the  value  of  the  tools  may  be  regarded  as 
ten  dollars.  (This,  of  course,  is  an  extreme  case  and 
one  introduced  only  by  way  of  illustration.)  But  the 
taxes,  insurance,  and  depreciation  on  the  machine  used 
by  the  one-dollar  boy  is  one  hundred  times  as  great  as 
the  tools  used  by  the  five-dollar  man,  and  the  burden  is 
calculated  in  on  the  direct  labor  of  each  in  the  ratio  of 
1:5;  when  the  value  of  the  machine  is  to  the  value  of 
the  tools  as  1000 :  10  or  100 : 1. 

This  and  other  discrepancies  are  not  taken  care  of 
under  the  percentage  plan.  When  the  direct  labor  is 
indicated  on  the  time  card  it  stands  as  the  base  on 
which  is  figured  the  proportion  of  the  burden  it  is  to 
bear,  regardless  of  any  inconsistencies  such  as  the  one 
above  last  noted.  This  makes  the  calculation  an  ar- 
bitrary one  and  not  one  giving  a  correct  solution  of  the 
problem  of  costs. 

The  hourly  burden  plan,  instead  of  distributing 

the  indirect  burden  expense  over  the  work  or  the  indi- 

_  „    s  vidual  job,  with  direct  wages  as  a  meas- 

The  Hourly-  J 

Burden  ure,    distributes    this   expense   over    the 

work  according  to  the  number  of  hours 

chargeable  against  such  work.     In  other  words,  the 

ratio  of  the  gross  burden  to  the  total  number  direct 


62  COST  OF  PRODUCTION 

labor  hours,  gives  the  percentage  by  which  the  direct 
wages  is  multiplied,  the  product  giving  the  burden 
which  that  particular  work  should  bear. 

By  use  of  the  hourly-burden  plan,  Cost  to  Produce 
may  be  entirely  different  than  when  figured  by  the  per- 
centage plan.  The  advocates  of  the  hourly-burden 
method  claim  that  it  is  far  more  logical  to  take  as  the 
basis  of  calculation  the  hour  instead  of  the  dollar.  One 
of  the  notable  faults  of  the  percentage  system,  that 
Factory  Cost  is  always  proportional  to  Prime  Cost,  is 
overcome.  What  in  the  percentage-burden  plan  is  over- 
looked— the  time  spent  on  a  job — is  brought  to  the  fore, 
and  the  factor  Time  is  considered  in  its  true  importance 
in  production  cost. 

Empiricism  is  as  manifest  in  the  distribution 
method  of  the  hourly-burden  plan  as  in  the  percentage- 
burden  plan.  The  one  arbitrarily  takes  as  a  base, 
wages;  the  other,  time.  In  order  to  have  a  system 
which  is  simple  in  operation,  accuracy  of  apportion- 
ment is  surrendered.  What  is  the  result?  The  system 
being  simple,  the  conditions  to  which  it  is  applied  must 
be  free  from  intricacy  or  complication  or  inaccuracy 
results.  Whether  this  inaccuracy  is  important  enough 
to  be  essential  depends  upon  the  complexity  of  the  facts 
to  which  the  system  is  applied.  The  two  are  propor- 
tional. 

If  we  return  to  the  example  of  the  one-dollar  man 
and  the  five-dollar  man,  it  will  be  seen  that  depreciation 
and  allied  charges  are  no  better  provided  for  by  taking 


MACHINE-RATE  PLAN  63 

time  as  a  base  than  by  taking  wages.  Either  plan  is 
unsatisfactory — and  particularly  so — when  low-priced 
labor  is  at  work  with  high-priced  machines  and  high- 
priced  labor  with  low-priced  machines  or  tools  at  the 
bench. 

It  is  not  to  be  hastily  assumed,  however,  that  be- 
cause of  inaccuracy  in  the  division  of  Burden,  that  the 
gross  cost  of  a  product  for  a  month  or  year  will  not  be 
correct.  Supposing  this  gross  cost  to  be  figured  once  a 
year;  obtained  by  either  method,  it  will  be  practically 
correct. 

The  machine-rate  plan  is  a  method  ante-dating 

both  the  percentage-burden  plan  and  the  hourly-burden 

plan,    having  its   origin    before   modern 

The 

Machine-Rate  methods  of  accounting  and  not  conform- 
able  to  them.  This  plan  as  most  com- 
monly in  use,  bases  on  the  probable  life  of  the  machine 
under  full  work,  an  hourly  interest  and  depreciation 
charge,  this  charge  to  be  distributed  over  the  work. 
By  extension,  and  to  provide  for  the  disposal  of  the 
remainder  of  Burden,  a  part  or,  rarely,  all  of  the  re- 
maining charges  are  arbitrarily  included  in  this  allo- 
cation. 

When  restricted  to  the  factors  Interest  and  Depre- 
ciation, and  when  a  machine  is  running  constantly,  the 
machine-rate  plan  is  an  accurate  one.  Inaccuracy  re- 
sults when  the  machine  lies  idle. 

The  advantage  of  the  machine-rate  plan  and  the 
one  which  has  kept  it  in  use  so  long  a  time,  is  that  the 


U  COST  OF  PRODUCTION 

system  provides  for  the  inequality  of  the  cost  of  work 
turned  out  on  the  various  classes  of  machines.  The  in- 
formation it  furnishes  is  valuable,  but  not  as  complete 
as  might  be. 

The  scientific  machine-rate  plan  of  Mr.  A.  Hamil- 
ton Church  is  one  designed  to  overcome  the  various 

drawbacks  of  other  plans.  The  shop  is 
The  ^  * 

Scientific  Ma-     divided  into  various  "production  centers," 

chine-Rate  Flan 

such  center  being  a  machine  or  a  bench  at 
which  a  workman  is  stationed,  each  station  being 
theoretically  a  minor  shop,  bearing  its  burden  of  rent, 
interest,  depreciation,  etc.,  independent  of  other  pro- 
duction centers  in  the  same  works. 

Mr.  Church  outlines  the  plan  as  follows : 
"First,  we  consider  each  machine  as  an  independ- 
ent production  center,  allocating  to  such  centers  all  the 
expenses  and  charges  which  caii,  on  reasonable  anal- 
ysis, be  considerable  as  chargeable  as  a  composite  rent 
or  machine  rate  for  all  the  factors  of  production  therein 
concerned.  Second,  we  charge  to  a  monthly  shop 
charges  account  all  charges  whatever  incurred  by  that 
shop,  including  all  the  items  specifically  represented  in 
fractional  detail  by  the  machine  rates,  and  also  includ- 
ing, of  course,  such  general  items  as  can  not  be  repre- 
sented in  the  machine  rates,  of  which  the  most  obvious 
item  is  the  supervision  of  a  head  or  foreman. 

"Then,  as  each  machine  is  occupied  on  jobs,  the 
latter  are  debited  with  so  much  per  hour  as  machine 
rate,  and  at  the  end  of  the  month  the  total  amount  so 


PLAN  TO  BE  FOLLOWED  65 

earned  by  the  machines  is  deducted  from  the  total  shop 
expenses,  leaving  a  balance  which  is  distributed  over 
the  same  jobs  as  a  supplementary  rate.  The  rates  of 
the  supplementary  rate  to  the  amount  distributed  by 
the  machine  rates  forms  a  varying  barometer,  whose 
fluctuation  is  an  index  to  the  current  efficiency  of  the 
shop." 

Additional  distribution  is  effected  in  the  scientific 
machine-rate  plan  by  the  ordinary  hourly-burden 
method  or  by  a  proportionate  increase  of  the  machine 
rate. 

Such,  in  brief,  are  practically  all  of  the  methods  in 
use  to-day,  for  apportioning  the  burden  to  the  manu- 
factured product.  That  this  apportionment  be  exact  is 
particularly  essential,  for  the  burden  seldom  repre- 
sents a  smaller  sum  than  direct  labor  and  is  often 
much  larger.  Burden  in  itself  may  represent  a  sum 
that  bears  an  important  ratio  to  the  capital  of  the  firm, 
and  correct  apportionment  alone  may  be  responsible 
for  success  of  the  plant,  as  inaccuracy  may  be  for  the 
failure  of  the  business. 

To  summarize,  it  may  be  said  that  it  is  impossible 
for  any  hard  and  fast  rule  to  be  laid  down  as  to  what 
plan  should  be  followed  in  instituting  a 
System?  system   of    cost    accounts.       No    system 

should  be  installed  without  a  thorough 
comprehension  of  the  organization,  management  and 
purpose  of  the  factory.  This,  of  course,  lies  within  the 
field  and  scope  of  the  specialist.     It  is  peculiarly  in 

5 


66  COST  OF  PRODUCTION 

keeping  with  modern  ideas  that  a  cost  expert  can  ex- 
amine the  conditions  present  in  a  given  factory,  install 
a  suitable  system  and  so  instruct  the  necessary  em- 
ploye's that  they  can  keep  the  system  in  active  and  use- 
ful operation. 

It  is  easy  to  generalize  and  say  that  the  percentage- 
burden  plan  is  the  safest,  particularly  where  wages 
form  a  large  part  of  the  cost  of  production  and  are 
comparatively  regular  in  amount;  or  that  the  hourly- 
burden  plan  with  a  partial  charge  for  machines  in  use, 
is  best  where  output  is  irregular  and  cost  of  labor 
varied,  but  it  all  simmers  down  to  this:  As  no  re- 
putable physician  will  prescribe  for  a  patient  without 
seeing  him  and  noting  all  modifying  conditions  so  as 
to  diagnose  the  case,  so  no  man — no  matter  how  expert 
he  be — can  advise  the  adoption  of  a  certain  plan.  A 
factory  may  lack  in  its  accounting  department  and 
have  a  superior  selling  force — then  it  can  not  use  a 
complicated  system.  Another  and  almost  similar  fac- 
tory boasts  a  superior  accounting  force  and  the  man- 
agement is  a  stickler  for  vouchers  and  red  tape — an 
exact  and  complicated  system  will  not  fall  into  bad 
hands  when  installed  there.  And  so  it  goes,  the  old 
story,  "Modifying  Conditions,"  yet  conditions  abso- 
lutely essential  to  be  reckoned  with  if  a  system  is  to 
yield  satisfactory  returns. 


CHAPTER  VIII 

INDIRECT  LABOR 

Indirect  Labor  is  given  as  the  first  element  of 
Burden,  and  has  been  defined  in  Chapter  III,  in  com- 
parison with  Direct  Labor,  to  which  it  is  related. 

There  has  always  been  more  or  less  haggling  over 

the  designations,  "productive"  and  "non-productive," 

as  applied  to  labor,  as  implying  that  the 

Term"Non-  epithet  "non-productive"  designates  the 
Productive"  .  ..,.,!,, 

worKer  is  an  expense — insinuating  that  he 

represents  an  outlay  for  which  there  is  no  adequate 
return.  As  an  example  of  this  asperity,  may  be  quoted 
the  stock  remark  of  the  manager  of  a  western  fire  in- 
surance company,  noted  for  its  habitually  strained  re- 
lations with  its  agents,  because  of  managerial  incompe- 
tency. On  a  special  agent  turning  in  a  list  of  appoint- 
ments, the  aforesaid  manager  would  observe,  "Too 
many  lawyers  in  the  list — we  don't  want  lawyers — they 
are  non-producers."  Himself  a  flagrant  example  of  a 
"non-producer,"  he  had  no  time  for  them  in  the  agency 
list. 

This  allegation  that  the  word  carries  with  it  the 
idea  of  expense  and  not  production,  may  or  may  not  be 
so,  as  a  term  may  mean  one  thing  to  one  man  and  a 
very  different  thing  to  another,  because  of  the  differ- 

67 


68  COST  OF  PRODUCTION 

ence  in  their  education,  bringing-up,  and  experience. 
No  such  charge  can  be  brought  against  the  use  of  the 
term  "direct,"  however,  and  it  possesses  the  distinct 
advantage  of  being  more  descriptive  than  "productive," 
so  probably  will  be  used  by  a  majority  of  writers  in  the 
future  as  it  has  in  the  past. 

In  the  use  of  the  term  Indirect  Labor  in  the  sci- 
ence of  costs,  it  is  always  to  be  remembered  that  it  ap- 
plies only  in  its  limited  sense  to  the  labor  which  is  a 
part  of  Burden.  Indeed  a  concise  and  strictly  accurate 
designation  would  be  "Burden-Labor,"  or  that  labor- 
only  which  is  a  constituent  of  Burden. 

To  be  more  explicit :   The  line  of  demarcation  be- 
tween Burden  and   Selling  Expense  can  not  be  too 
.    .  strictly     drawn.      The     reason— outlined 

Exclusion  of 

selling  Expense  here,  and  more  fully  developed  later  on — 

From  Burden 

is  this:  Factory  Cost  is  the  value  of  the 
product  as  laid  down  after  manufacture  in  the  ware- 
house. No  part  or  parcel  of  Selling  Expense  must  be 
included  in  Burden  or  our  warehouse  value  is  inflated 
just  that  much,  and  when  inventory  is  taken,  that  ex- 
pense shows  up  in  the  balance  sheet  as  an  asset.  For 
instance,  a  factory  has  a  Manager  and  an  Assistant 
Manager.  The  first  man  devotes  his  time  exclusively  to 
sales,  superintending  the  selling  force  and  devoting 
his  energies  to  disposal  of  the  product.  Meanwhile  the 
Assistant  Manager  is  in  the  factory  increasing  pro- 
ductive capacity.  The  one  takes  care  of  sales,  the  other 
looks  after  output.    The  first  man's  expense  has  nothing 


INDIRECT  LABOR  69 

to  do  with  Factory  Cost.  The  factory  would  run  and 
its  output  be  put  in  the  warehouse — let  us  suppose — 
even  if  there  were  no  sales  force.  With  the  second  man 
it  is  different.  His  is  Indirect  Labor,  and  as  such  is  a 
part  of  Factory  Cost. 

The  question  naturally  arises  here,  "Is  not  the 
labor  of  the  first  man  as  well  as  the  second  man,  Indi- 
rect Labor?"  It  is,  in  a  generic  sense;  it  is  not  in  a 
limited  sense.  Nor  need  any  confusion  result  there- 
from. We  have  seen  that  the  term  "labor"  has  two 
meanings,  the  generic  meaning  being  "work  done  for 
the  accomplishment  of  an  end,"  and,  restrictedly,  "di- 
rect labor."  Similarly,  Indirect  Labor  has  two  defini- 
tions: (1)  Broadly,  any  labor  not  direct  labor;  and  (2) 
restrictedly,  any  labor  a  constituent  of  Burden.  So, 
applying  the  generic  definition  to  the  question  above, 
we  have  the  application  that  both  are  in  the  class  of 
Indirect  Labor  in  sense  1 ;  and  only  the  latter  in  sense  2. 

Viewed  from  the  standpoint  of  the  lexicographer, 
the  terms  are  not  unusually  complex,  for  our  most 
common  words  have  a  large  number  of  meanings — the 
noun  "strike"  having  no  less  than  eighteen  separate 
and  distinct  definitions. 

The  calculation  of  the  amount  of  indirect  labor 

is  perhaps  the  most  complicated  of  any  of  the  items 

which  go  to  make  up  the  indirect  expenses 
Indirect 
Labor  or  Burden.    The  test  of  Direct  or  Indirect 

Calculation 

Labor  is  not  so  much  on  the  point  of  pro- 
duction and  non-production  as  on  the  point  of  charge- 


70  COST  OF  PRODUCTION 

ability  to  some  piece  of  work.  For  instance,  if  we  sup- 
pose that  an  employe'  is  at  work  one  hour  at  the  manu- 
facture of  a  dynamo  for  stock,  and  is  taken  off  this 
work  to  assist  in  the  repair  of  a  motor,  working  thereat 
four  hours,  and  later  in  the  day  takes  a  foreman's  place 
for  the  afternoon,  then  his  time  card  coming  in  and 
showing  the  foregoing  facts,  will  call  for  an  apportion- 
ment as  follows :  Direct  labor  on  stock  order  number 
— ,  1  hour;  Upkeep  of  plant,  4  hours;  Indirect  labor, 
5  hours.  As  a  usual  thing,  the  determination  of  Indi- 
rect Labor  will  not  be  extremely  difficult,  but  in  the 
case  of  a  large  number  of  "split"  time  cards  coming  in 
it  will  be  detailed  work  rather  than  particularly  hard. 

In  case  the  gross  burden  is  calculated  yearly  or  for 
some  similar  period,  a  daily  running  account  may  be 
kept  with  Indirect  Labor,  which  will  be  the  amount 
not  otherwise  charged  to  some  work  or  job,  the  account 
being  treated  as  though  it  were  a  continuous  piece  of 
work  being  totaled  when  the  burden  is  calculated  at  the 
end  of  the  fiscal  year  or  on  the  taking  of  inventory. 
This  is  liable  to  reveal  the  fact  that  Indirect  Labor, 
when  totaled,  is  a  much  more  considerable  amount  than 
might  be  supposed  off-hand. 

Here  comes  up  the  question  of  the  relation  of  In- 
direct Labor  to  those  indirect  administration  expenses 
— salaries  of  officers  and  directors,  When  the  ways  of 
high  finance  are  considered,  it  will  be  seen  that  no 
irony  is  intended  when  the  statement  is  made  that 
many  such  salaries  should  be  considered  as  profit ;  that 


SALARIES  71 

the  drawee  of  a  fat  salary  for  which  he  has  given  no 
return,  perhaps  not  even  visited  the  plant  of  which  he 
is  an  officer,  is  merely  participating  in  an  irregular 
division  of  the  profits  of  the  business.  At  the  other 
extreme  we  have  the  manager  who  has  worked  his  way 
up  from  the  bottom,  and  who  is  not  averse  to  taking  a 
turn  in  the  drawing  room  or  even  at  the  bench,  becom- 
ing for  the  time  being,  an  exponent  of  Direct  Labor. 
Then,  too,  we  may  have  officers  whose  work  is  merely 
administrative  as  regards  either  Selling  Expense  or 
Factory  Cost,  and  countless  other  variations  and  modi- 
fications. Therefore  it  would  seem  just  that  the  sal- 
aries be  charged  to  such  items  as  are  proportionate  to 
the  class  of  work — to  Indirect  Expenses  and  Indirect 
Labor. 

This  procedure  can  not  but  be  unsatisfactory  un- 
less done  with  a  thorough  understanding  of  the  object 
of  the  business,  and  the  relation  of  those  participating 
in  its  management. 

As  a  discussion  of  the  relation  of  Direct  Labor  to 
Indirect  Expense  falls  within  the  scope  of  the  latter, 
the  reader  is  referred  to  the  chapter  dealing  with  that 
factor. 


CHAPTER    IX 

MINOR  BURDEN  ELEMENTS 

The  minor  elements  of  Burden  are:  (1)  Power; 
(2)  Heat;  (3)  Light;  (4)  Rent;  (5)  Taxes;  (6)  In- 
suiance. 

These  elements  give  little  or  no  trouble  in  calcula- 
tion of  costs. 

Power,  Heat,  and  Light  are  similar  as  elemental 
parts  of  Burden,  for  each  may  be  purchased  outright 
from  a  power-,  heat-,  or  lighting-plant,  or  may  be 
derived  from  a  machine  operated  as  a  part  of  the  equip- 
ment. 

In  many  cases  the  fuel  account  is  a  large  and  im- 
portant one,  and  one  that  by  reason  of  its  importance 
can  not  be  handled  as  a  part  of  the  stores.  In  such 
cases  it  is  advisable  to  have  a  system  using  a  complete 
fuel  register,  similar  in  operation  to  that  described  in 
the  chapter  on  "Material."  Fuel  is  chargeable  to 
Power,  Heat,  Light,  or,  rarely,  to  Accessory  Material. 
Taxes  and  Insurance  offer  no  difficulty  of  disposal, 
either  in  calculation  or  allocation.  Practically  all 
business  insurance  is  calculated  yearly,  and  rates  vary 
little  from  year  to  year.  Short  term  insurance,  if  on 
material  in  the  process  of  manufacture  is  a  part  of  the 
factory  price,  but  if  manufactured  goods  are  insured  in 


THE  FACTOR  RENT  73 

the  warehouse,  such  insurance  becomes  a  part  of  the 
expense  of  selling. 

In  the  second  element,  Rent  is  one  about  which 
there  is  a  great  deal  of  disagreement.  One  extreme 
view  is  that  the  price  paid  for  rented  quarters  is  in 
the  nature  of  profit :  that  is,  the  landlord  has  invested 
or  supplied  a  portion  of  the  capital.  Rent  is  the  in- 
come or  profit  from  this  investment.  All  sums  paid  for 
rent  eventually  come  from  business  earnings.  As  such, 
they  form  no  part  of  factory  cost,  and  add  no  value 
whatever  to  inventory  price. 

At  the  other  extreme  is  the  view  that  rent  is  as 
much  an  expenditure  as  though  paid  out  for  any  com- 
modity and  should  be  charged  in  as  a  part  of  Burden, 
whether  the  company  owns  the  rented  building  or  pays 
a  regular  price  for  their  occupancy  of  it. 

The  medium  ground  seems  to  be  the  conservative 
one  in  the  disposal  of  the  factor  Rent.  If  the  building 
is  one  not  owned  by  the  company,  then  charge  rent  in 
Burden.  If  the  building  is  one  owned  by  the  company 
and  because  of  such  ownership  represents  an  invest- 
ment of  their  capital,  then,  there  being  no  rent  actually 
paid,  consider  same  along  with  interest  on  investment, 
as  a  part  of  Profit. 

The  reason  for  such  disposal  of  Rent  seems  to  be 
a  fair  one.  If  the  company  has  actually  invested  the 
capital  necessary  to  buy  the  buildings,  then  Rent  comes 
in  the  same  category  as  Interest,  and  is  disposed  of  as 
is  Interest,  as  a  part  of  Profit,  because  we  do  not  want 


74  COST  OF  PRODUCTION 

to  inflate  our  warehouse  cost  and  so  make  our  goods 
of  more  apparent  value  than  they  really  are.  But  if 
the  company  has  no  actual  investment  in  the  buildings, 
then,  day  by  day  they  are  paying  out  for  working  room 
a  certain  sum  which  is  and  must  be  an  expense,  just  as 
insurance  is  an  expense  or  heating  an  expense,  and  as 
such,  is  a  part  of  Burden, 


CHAPTER    X 

DEPRECIATION,   UPKEEP,    AND   RELATED 
FACTORS 

Depreciation  is  a  lessening  in  value  from  age  and 
contributory  causes.  This  is  a  term  that  is  closely 
related  to  Upkeep,  which  is  collectively,  those  altera- 
tions, substitutions,  or  repairs  necessary  to  offset  de- 
preciation and  keep  a  plant  or  any  part  of  a  plant  in 
the  state  required  for  advantageous  work. 

Intermeshing  loosely  with  the  factor  Depreciation 
is  Amortization.    Amortization  is  the  extinction  or  re- 
duction of  a  debt  through  a  sinking  fund. 
Factors  ^is  concerns  Depreciation  only  as  In- 

terest concerns  it.  Interest  on  the  capital 
of  a  firm  and  the  deterioration  of  the  buildings,  ma- 
chines, stock,  etc.,  in  which  this  capital  is  invested  are 
related,  but  not  so  clearly  but  that  Depreciation  and 
Upkeep  may  be  considered  separate  from  it,  particu- 
larly if  interest  be  calculated  as  a  part  of  and  taken 
care  of  by  Profit. 

The  determination  of  Depreciation  as  a  factor  in 
factory  management  or  more  restrictedly  in  the  sci- 
ence of  costs,  is  a  matter  of  great  importance,  and 
errors  in  the  calculation  of  this  factor  render  both 
Factory  Cost  and  Profit  inexact.    While  it  sounds  like 

75 


76  COST  OF  PRODUCTION 

the  repetition  of  a  truism  to  set  down,  "no  fixed  rules 
can  be  given  for  the  computation  of  Depreciation,"  yet 
such  is  the  case  and  practice  must  conform — as  in 
many  other  divisions  of  the  science  of  costs — to  the  con- 
ditions surrounding  the  business. 

It  is  safe  to  say  that  the  underlying  principles  of 
Depreciation  are  more  exact,  and  may  be  more  thor- 

.    .  oughly  understood   than   those  of  many 

Depreciation 

studied  other  factors  going  to  make  up  Cost.    For 

by  Insurers 

this  we  have  to  thank  the  business  of  fire 

insurance  directly,  though  marine  insurance  takes  cog- 
nizance of  Depreciation,  in  its  restricted  field,  the  valu- 
ation of  marine  risks.  Fire  insurance,  which  puts  at 
risk  every  species  of  insurable  property,  concerns  itself 
directly  with  the  state  of  the  risk  as  regards  original 
and  depreciated  value  at  the  time  of  the  fire.  Conse- 
quently this  subject  has  been  made  a  study  by  under- 
writers since  the  time  the  first  risk  was  written  and  the 
first  loss  occurred,  with  the  result,  as  before  stated, 
that  the  principles  underlying  Depreciation  are  well 
marked  out  and  agreed  upon. 

The  present  tendency  of  all  well-regulated  plants 
to  keep  everything  repaired  up  to  the  highest  point  of 

efficiency,  often  makes  Upkeep  lower  De- 
Depreciation 

and  the  Factory  preciation  very  appreciably.  This  is  par- 
Buildings 

ticularly  applicable  to  factory  buildings 

of  late  construction.    A  building  having  its  foundation 

laid  in  concrete,  its  skeleton  of  steel  and  cased  in  brick 

or  concrete  blocks,  is  not  only  subject  to  slow  deprecia- 


A  METHOD  OF  DEPRECIATION  77 

tion,  but  every  part  in  its  make-up  may  be  said  to  be 
standard  and  renewable  as  desired.  In  this  class  of 
buildings  an  average  or  aggregate  value  is  maintained. 
But  all  factories  can  not  be  called  well-regulated  and  it 
is  not  with  buildings  of  this  class  that  the  cost  de- 
determiner  or  cost  accountant  commonly  has  to  deal. 
Sometimes  the  factory,  by  reason  of  its  rapid  growth  is 
composed  of  a  series  of  additions  to  the  original  plant 
and  is  kept  in  such  a  state  as  is  warranted  by  the  fact 
that  "the  management  intends  to  build  next  year." 
Sometimes  the  factory  is  a  rented  building:  other 
times  it  is  part  owned  and  part  rented.  In  some  cases 
the  building  itself  is  neglected  because  the  business  is 
so  profitable  and  requires  so  much  time  that  there  is 
little  time  left  to  make  any  but  those  repairs  that  ac- 
tually can  not  be  gone  without. 

The  value  of  a  plant  and  buildings  at  the  outset  of 
business  is,  of  course,  100  per  cent  and  decreases  with 

.  „  the  passage  of  time  until  its  value  is  nil. 

A  Common 

Method, of  Perhaps    the   most    common    method    of 

Depreciation  .  ,   , .  _  ,  ■ 

reckoning  depreciation  values  is  by  writ- 
ing off  a  certain  per  cent,  as  5  per  cent — or  such  other 
figure  as  may  be  deemed  desirable — as  the  sum  to  be 
deducted  annually  from  the  depreciated  value.  The 
value  of  the  depreciated  property  then  stands  at  the 
outset  of  its  second  year  as  95  per  cent  of  its 
original  value  plus  the  sum  expended  for  its  main- 
tenance and  upkeep.  The  principle  underlying  this 
method  has  the  merit  of  being  sound,  but  in  practice  it 


78  COST  OF  PRODUCTION 

leads  to  inaccurate  results.  These  inaccuracies  come  in 
more  from  the  upkeep  of  machinery  than  from  the 
maintenance  of  buildings.  It  is  no  uncommon  thing 
for  a  machine  to  be  rebuilt  after  purchase,  such  rebuild- 
ing taking  place  either  immediately  after  purchase  or 
as  the  demands  of  the  work  call  for  it.  Suppose  that, 
immediately  after  purchase  the  gray  iron  of  a  machine 
is  replaced  by  steel  and  the  machine  is  worked  over  to 
suit  the  ideas  of  an  employe'.  On  inventory  the  value 
of  this  machine  will  be,  original  cost  less  specified  per 
cent  of  depreciation  plus  repairs,  making  it  a  watered 
asset. 

During  the  first  years  of  a  business  the  disposition 
of  too  large  a  percentage  of  the  surplus  of  income  over 
expenditure  as  Profit  instead  of  a  good  part  appor- 
tioned as  Depreciation  is  the  cause  of  the  failure  of 
many  apparently  successful  ventures.  In  the  case  of 
a  business  having  a  large  amount  invested  in  depreci- 
able* property,  the  tendency  to  declare 
Upkeep  Neg- 
lected to  Swell     some  or  a  large  dividend  is  frequently  too 

strong  to  be  resisted,  so  a  fictitious  profit 
is  forced,  often  for  the  purpose  of  inflating  the  com- 
pany's stock.  Profitable  repairs  and  the  required  up- 
keep are  both  postponed  as  well,  with  the  result  that 
if  new  capital  is  not  interested,  that  stock  values  sink 
accordingly,  and  assessments  must  be  made  later  to 
cover  necessary  charges  for  Depreciation.  Earnings 
may  remain  a  constant  factor  meanwhile,  and  stock 

♦Depreciable,  a.  Capable  of  or  liable  to  depreciation;— a  new  use  of  the 
■word 


GROWTH  OF  PLANT  79 

values  go  up  or  down  as  expenditures  are  made  on  the 
plant  or  not. 

In  the  case  of  large  manufacturing  plants,  or  those 
having  owners  very  particular  about  repairs,  the  out- 
lay for  renewals  and  upkeep  may  balance  the  average 
depreciation  of  the  entire  plant.  To  quote  a  trite  and 
time-honored  saying,  it  must  be  borne  in  mind  that  a 
chain  is  no  stronger  than  its  weakest  link,  and  if  upkeep 
is  localized,  there  will  come  a  time  when  the  gradual 
and  hitherto  unnoticed  lessening  of  value  in  parts  of  the 
plant  not  renewed,  will  manifest  itself  and  call  for  un- 
expected expenditures — unexpected  because  the  allow- 
ance for  the  renewal  of  the  plant  has  always  been  a 
liberal  one. 

Any  business  able  to  continue  in  the  field  at  all, 
generally  is  obliged  to  extend  or  modify  its  plant.  The 

reason    for    this    is    two- fold;    (1)    The 
Provision  for 

Growth  of  natural  increasing  demands  of  business, 

Plant 

the  plant  being  too  small  to  handle  the 

trade;  (2)  the  fact  that  few  firms  starting  again  in 
business  would  duplicate  their  original  plans.  The 
American  manufacturer  and  business  man  is  always 
willing  to  extend  his  factory  or  business  if  there  is  a 
fighting  chance  of  its  being  made  to  pay.  He  is  also 
ready  to  tear  out  a  building  or  machine  and  remodel  or 
replace  it  with  one  that  will  better  "do  the  business." 
Just  when  such  expenditure  is  chargeable  to  Capital 
and  when  to  Depreciation  is  not  easy  to  determine.  It 
may  be  that  the  management  can  determine  the  classi- 


80  COST  OF  PRODUCTION 

fication  of  such  expenditure,  but  for  those  not  familiar 
with  the  object,  tendencies,  and  future  of  the  business, 
it  is  practically  impossible.  When  a  needed  addition  is 
made  to  a  building,  it  stands,  of  course,  as  an  expendi- 
ture of  capital,  but  such  addition  may  lead  to  the  sub- 
sequent abandonment  or  deterioration  of  the  older  part. 
Many  a  business  is  tided  over  unexpected  expenditures 
or  a  period  of  financial  depression  because  extensions 
and  heavy  repairs  have  been  taken  care  of  by  Revenue 
instead  of  Depreciation. 

The  object  of  the  various  methods  of  calculating 
Depreciation  is  to  represent  the  real  value  of  the  ma- 
terial part  of  the  plant,  by  means  of  depreciative*  ac- 
counting instead  of  by  revaluation.  Greater  accuracy 
might  result  by  periodic  revaluation,  writing  off  such 
loss  as  these  valuations  showed,  regardless  of  any  reg- 
ular rate.  This  would  give  a  more  accurate  idea  of 
deterioration,  particularly  if  such  deterioration  were 
irregular,  as  from  a  long  period  of  hard  running,  alter- 
nating with  a  similar  period  of  comparative  idleness. 

This  method  of  depreciation  reckoning  is  practical 
only  where  the  plant  and  process  of  manufacture  are 
so  simple  as  to  permit  its  use  without  considerable 
trouble.  Frequently  manufactories  are  so  constituted 
as  to  require  the  application  of  this  method  to  some  of 
the  more  important  items,  the  remainder  of  the  plant 
having  the  regular  depreciation  calculated  and  appor- 
tioned without  a  particularly  close  examination.  Thus 
a  general  electrical  manufactory  may  revalue  its  ma- 

*  Depreciative,  a.  Of,  relating  to,  or  designating  depreciation. 


VALUATION  AND  ADJUSTMENTS  81 

chine  tools  costing  |500  or  above,  every  year  or  six 
months,  and  write  off  a  certain  per  cent  for  the  rest  of 
the  plant. 

The  plan  of  periodic  valuation  instead  of  that  of 

the  regular  depreciation  rate,  while  theoretically  more 

nearly  perfect,  is  subject  to  some  draw- 

Vrtrtton  backs*    Under  the  first  Plan  the  basis  of 

appraisal  is  generally  the  two  following 

facts:  (1)  Condition  of  the  property  at  the  time  of  its 
examination;  (2)  earning  capacity.  Taking  these  facts 
as  a  premise  may  lead  to  a  wrong  conclusion,  as  de- 
terioration may  not  show  from  either;  the  property 
may  look  to  be,  and  as  far  as  earning  capacity  goes 
may  be,  as  good  as  new.  Nevertheless,  every  year  of 
use  or  work  is  a  year  taken  from  its  working  life,  and 
provision  must  be  made  for  its  final  replacement  or  this 
replacement  will  inflict  a  heavy  loss  in  the  future. 
With  this  idea  of  replacement  in  mind,  therefore,  a 
percentage  may  be  written  off  the  present  value,  though 
any  apparent  depreciation  is  not  present.  If  such  is 
the  case,  then  it  is  really  an  adoption  of  the  depreci- 
ative  rate. 

It  is  well  to  write  off  sufficient  depreciation  during 

the  first  years  of  the  working  of  a  plant,  even  if  there 

are  evident  no  signs  of  a  lessening  in  value, 

v!duesment        as  by  such  means  tne  valuation  will  stand 
in  case  of  any  fire  loss  covered  by  insur- 
ance.   In  a  fire  insurance  adjustment  a  yearly  depreci- 
ation is  figured  off  from  the  original  cost  or  value  of 
6 


82  COST  OF  PRODUCTION 

the  property,  regardless  of  replacement  value,  and  it 
is  often  disappointing  to  find  that  values,  as  standing 
in  the  books  of  the  company  seem  inflated  in  case  of 
loss  by  fire. 

As  a  consequence  of  the  reasons  given,  and  par- 
ticularly on  account  of  the  difficulties  of  time  and  ex- 
pense standing  in  the  way  of  the  carrying  out  of  a  sys- 
tem of  periodic  valuation,  this  system  is  little  used. 
The  plan  which  is  in  general  use,  and  the  one  next  in 
accuracy  to  the  plan  of  periodic  valuation,  concerns 
itself  with  the  establishment  of  average  rates,  which 
are  written  off  yearly  or  semi-yearly.  As  a  check  to 
the  accuracy  of  these  calculations,  valuation — either 
complete  or  partial — may  be  taken  as  often  as  deemed 
practical. 

Depreciation  has  been  defined  as  a  lessening  in 
value  from  age  and  contributory  causes.     These  con- 
tributory  causes  may  come  from  or   be 
Contributory 

Causes  modified  by  other  causes  than  what  is  com- 

monly termed  "wear  and  tear."  Physical 
condition  and  the  elements  affecting  it  are  first  thought 
of  in  connection  with  depreciation,  but  the  value  of 
any  material  property  may  be  affected  to  a  great  ex- 
tent by  influences  not  in  common  with  such  physical 
condition.  These  contributory  causes  may  be  enumer- 
ated as:  (1)  Tenure  of  holding;  (2)  probability  of  uni- 
form, regular,  or  increasing  employment;  (3)  ex- 
haustion of  (a)  base  of  manufacture,  or  (b)  field  for 
disposal  of  manufactured  product;  (4)  probability  of 


TENURE  83 

improved  methods,  processes,  equipment,  or  the  like, 
making  of  no  further  practical  use  the  specified  prop- 
erty;  (5)  those  unforseen  events  which  no  prudence, 
however  great,  can  guard  against  or  provide  for.  These 
and  similar  conditions,  are  more  to  be  considered  as 
under  the  head  of  amortization,  than  within  the  prov- 
ince of  depreciation,  and  excepting  only  in  rare  cases, 
it  is  best  to  so  provide  for  them  in  allocation  or  ac- 
counting. 

(1)     As  regards  the  item  of  tenure  or  holding, 

there  may  be  various  cases.    A  common  case  is  that  in 

which    the    building    is    merely    rented. 

Tenure 

or  Usually  the  lease  will  contain  a  covenant 

Holding 

to  repair,  which  has  been  adjudged  to 
mean  "to  keep  the  premises  in  as  good  repair  as  when 
the  agreement  was  made,"  but  ordinary  depreciation 
can  hardly  be  said  to  call  for  any  extensive  repairs. 
In  case  the  agreement  or  conditions  should  be  such 
that  the  trade  fixtures  and  appurtenances  become  the 
property  of  the  landlord,  the  need  of  a  sinking  fund 
becomes  apparent  at  once,  as  capital  so  invested  be- 
comes a  loss  at  the  expiration  of  the  lease.  The  law — 
ever  subject  to  liberal  interpretation  when  trade  is  to 
be  encouraged — does  not  compel  as  high  a  class  of 
maintenance  as  the  owner  would  naturally  keep  up. 
The  lessee  may  even  permit  his  machinery  to  be  worked 
to  death  before  the  lease  expires,  and  take  toward  his 
sinking  fund  sums  he  would  otherwise  devote  to  up- 
keep and  maintenance. 


84  COST  OF  PRODUCTION 

(2)  In  determining  depreciation  rates  the  proba- 
bility of  uniform,  regular,  or  increasing  employment 
or  the  reverse,  for  the  plant,  is  an  important  factor. 

The  entire  business  may  depend  upon  the 
Permanency 

of  validity   of   certain   patents,   an   act   of 

Employment 

congress,  of  the  legislature,  or  a  contract 

for  a  term  of  years.  But  the  most  disturbing  factor 
liable  to  upset  ordinary  business  probabilities  is  the 
far-reaching  effect  of  the  trust.  Those  classes  of  manu- 
facture or  trade  which  are  subject  to  trust  competition 
are  liable  to  dangerous  interference,  or  even  total  ex- 
tinction within  a  fair  term  of  years.  Because  of  con- 
tingencies of  this  class,  the  argument  for  a  high  rate 
of  depreciation  is  a  sane  one  and  one  that  is  given 
more  consideration  than  formerly,  when  profits  were 
not  only  larger  but  more  sure.  That  this  depreciation 
rate  should  be  used  in  conjunction  with  a  sinking  fund 
for  the  replacement  of  sunk  capital,  is  also  manifest. 

(3)  Closely  related  to  cause  (2)  above  and  in 
many  cases  a  subdivision  of  it,  is  exhaustion  of  (a) 

basis  of  manufacture;  or  (b)  field  for  dis- 

Mannfacture 

and  Disposal  posal  of  manufactured  product.  In  re- 
gard to  (a)  may  be  noted  as  the  best  ex- 
amples, mining  or  lumber  industries  liable  to  exhaus- 
tion after  a  certain  period  of  work.  As  regards  (b) 
exhaustion  of  field  for  disposal  of  manufactured  pro- 
duct, the  most  evident  examples  of  this  class  of  indust- 
ries are  those  depending  upon  style  or  fashion  for  their 
maintenance. 


NEW    CONDITIONS  85 

The  calculation  of  the  cost  of  production  in  all 
works  of  the  classes  last  set  forth  above  demands  that 
the  allowance  for  depreciation  be  a  most  liberal  one. 
If  the  demand  be  reasonably  sure  but  subject  to  those 
Figuring  De-  fluctuations  which  mark  certain  lines 
£rt*ri!££-  navinS  slack  Periods  alternating  with 
ating  Demand  periods  of  great  activity,  a  uniform  yearly 
rate  may  be  figured,  or  more  preferably,  a  high  rate 
figured  during  the  rush  and  a  lower  rate  during  the 
lull.  That  depreciation  does  not  stop  during  disuse 
or  storing  is  commonly  known,  but  the  charge  should 
surely  be  made  large  enough. 

(4)  In  many  lines  of  manufacture  and  trade,  the 
probability  of  improved  methods,  processes,  equipment, 

or  the  like,  making  of  no  further  practical 
New  Methods  '  &  F 

and  use  part  or  all  of  a  plant,  is  always  a  pos- 

Inventions 

sibility.    In  certain  lines  this  contingency 

is  so  small  as  to  hardly  need  provision  for,  as  the  inertia 
of  the  buying  public  once  started,  will  continue  in  the 
face  of  any  but  absolute  replacement  at  a  lower  cost. 
The  trend  of  invention  is  always  toward  automatic 
production  with  as  little  labor  as  possible — and  that 
low-priced — leaving  skilled  labor  for  supervision.  This 
replacement,  or  liability  toward  replacement,  will  not 
be  provided  for  unless  the  rate  be  a  generous  one. 

Improvement  of  product  is  also  one  of  the  tenden- 
cies of  invention,  and  competition  may  call  for  new 
machines  which  must  be  provided  for  out  of  the  capital 


86  COST  OF  PRODUCTION 

of  the  plant.  Instances  of  this  kind  have  been  very 
noticeable  in  the  older  industries,  which  have  lately 
New  Machines  Deen  subject  to  great  improvement.  In 
improvethe  steam  laundering  the  introduction  of  the 
Product  smoother  for  the  raw  edges  of  standing 

collars  is  an  example  of  a  machine  designed  to  improve 
the  product.  Such  a  machine  adds  a  new  process  to 
the  number  ordinarily  performed  but  is  demanded  by 
the  call  for  superior  work.  The  protection  afforded  by 
the  introduction  of  such  machinery  as  will  guarantee 
a  superior  product  is  often  more  effective  than  were  the 
same  amount  retained  as  a  sinking  fund;  indeed,  the 
progressive  American  business  man  deems  high  efficency 
of  the  working  plant  to  be  better  than  high  dividends, 
for  he  has  the  utmost  confidence  that  the  former  will 
surely  bring  the  latter.  It  is — as  it  is  almost  needless 
to  say — just  this  spirit  which  has  placed  America  far  to 
the  fore  in  the  race  for  the  commercial  supremacy  of  the 
world. 

(5)     There  are  lines  of  business  and  manufacture 
peculiarly  subject  to  certain  contingencies  which  may 

not  be  insured  against,  because  no  com- 
Contingencies 

Not  to  be  pany  can  be  found  to  take  the  risk.    These 

Insured  Against  .  . 

contingencies  are  not  strictly  depreciation 

nor  may  they  come  within  the  scope  of  the  subject,  but 
are  worth  a  word  in  passing.  A  mine  may  be  subject  to 
flooding ;  a  dynamite  factory  to  explosion ;  certain  lines 
of  trade  lay  open  to  strikes  of  employe's  or  danger  of 
incendiarism — all  of  which  can  not  be  foreseen  nor  in- 
sured against. 


DEPRECIATION    AND    RESERVES  87 

In  case  a  company  is  large  enough  and  conditions 
warrant,  a  reserve  fund — separate  from  that  of  depreci- 
ation— should  be  maintained,  proportionate  in  size  to 
the  amount  at  risk  and  the  probability  of  the  contin. 
gency  so  insured  against  coming  to  pass.  This  fund, 
when  so  obtained,  is  often  entered  upon  the  books  under 
the  guise  of  "Depreciation,"  when  it  is  nothing  more 
nor  less  than  a  reserve  fund  or  a  fund  for  insurance. 
The  reason  for  this  is  not  hard  to  be  seen.  What  the 
stockholder  wants  is  dividends.  The  future  of  the  com- 
pany he  considers  is  not  his  direct  business;  that  de- 
volves upon  the  officers  or  the  manager.  Consequently, 
to  provide  a  reserve  really  necessary — particularly  from 
the  viewpoint  of  the  manager — what  would  otherwise 
be  dissipated  as  dividends  is  kept  under  company  con- 
trol disguised  as  a  depreciation  fund  for  renewal  of  the 
plant. 

Another  plan  that  is  sometimes  followed  is  this: 
The  original  value  of  the  plant  is  retained  on  the  com- 
pany books.  Under  "Depreciation  and  Reserve,"  stands 
a  fund  derived  from  a  portion  of  the  profits  of  the  busi- 
ness. Providing  no  actual  misunderstanding  results 
from  such  designation,  it  does  no  particular  harm,  but 
it  must  be  remembered  that  instead  of  a  tangible  sum 
subject  to  the  requirements  of  the  business,  the  entry 
shows  ouly  loss  coming  from  the  age,  wear,  and  con- 
tributory causes. 

The  site  of  a  plant — or  more  rarely  the  buildings 
themselves — may    increase   in    value   so   as   to   offset 


88  COST  OF  PRODUCTION 

the  natural  wear  and  tear  of  the  occupied  structures. 
This  may  be  brought  about  by  the  natural  increase  of 

real  estate  or  may  be  forced  by  the  erec- 
Appreciation 

of  tion  of  high-class  buildings  in  the  imme- 

diate vicinity,  or  from  other  and  more  re- 
mote causes.  This  offset,  however,  should  be  considered 
theoretical,  and  to  be  otherwise  provided  for  than  by 
being  set  over  against  positive  physical  impairment,  but 
such  depreciation  should  be  treated  as  though  there  were 
no  appreciation  of  site.  A  revaluation  of  the  property 
affected  by  appreciation  will  not  only  be  more  exact, 
but  will  be  more  satisfactory  than  when  set  over  against 
the  fund  caring  for  depreciation.  In  providing  a  basis 
upon  which  to  calculate  depreciation,  the  value  at  the 
time  such  calculations  are  begun,  is  taken.  This  valu- 
ation will  be  the  price  paid,  providing  the  plant  was 

purchased  outright.    In  many  cases,  how- 
Depreciation 
Based  Upon         ever,  it  is  desired  to  equip  a  going  plant 

Valuation 

with  a  cost  system.  The  history  of  most 
industrial  undertakings  is  one  of  growth,  the  plant 
starting  in  a  small  way  and  being  added  to  irregularly, 
the  increment  being  the  result  of  the  increasing  de- 
mands of  the  trade.  When  such  a  business  wishes  the 
necessary  basis  for  the  calculation  of  depreciation  a 
valuation  will  be  necessary.  Here  must  be  combatted 
the  fallacy  that  actual  worth  is  the  cumulative  cost  of 
an  article  or  machine,  because  "it  would  take  that  much 
to  replace  it,"  and  the  valuation  should  avoid  the  ever- 
present  danger  of  inflation. 


CALCULATING    DEPRECIATION  89 

Continental  and  English  articles  of  association  fre- 
quently specify  the  rate  of  depreciation  to  be  written 
off.  This  might  do  for  conservative  ventures  in  a  con- 
servative country  where  the  prospect  of  success  in  any 
line  may  almost  be  said  to  be  determinable  by  proba- 
bility tables  compiled  from  past  records,  but  for  use  in 
a  younger  country  where  records  of  production  are  con- 
sulted only  that  they  may  be  broken,  any  method  setting 
a  rate  of  depreciation  in  the  company  articles  is  bound 
to  be  inaccurate.  This  method  generally  applies  a  cer- 
tain part  of  the  profits  for  wear  and  tear,  but  deteriora- 
tion may  be  greatest  during  a  season  when  the  profits 
of  the  business  are  smallest. 

Besides  the  percentage-on-profits  plan  there  are  two 
others,  one  calculating  depreciation  as  proportionate  to 
„      „  *  the  plant  output,  the  rate  being  deter- 

Metiiod  of 

Calculating  mined  by  the  experience  of  the  business 
during  past  years;  the  other  plan  taking 
the  capital  value  remaining  from  the  year  last  past  as 
a  basis.  This  latter  plan  is  for  nearly  all  conditions  the 
one  most  suitable.  Depreciation  is  commonly  calculated 
at  the  close  of  the  fiscal  year,  at  which  time  Upkeep  is 
also  summed  up  and  made  a  charge  against  the  revenue 
account.  General  activity,  either  of  the  plant  as  a 
whole  or  of  certain  departments  may  influence  the  de- 
preciation rate  and  raise  or  lower  it  proportionate  to 
the  amount  of  production. 

The  fact  that  wear  is  not  always  immediately 
visible  often  leads  to  a  misapprehension  that  a  rate  is 


90  COST  OF  PKODUCTION 

too  high.  Depreciation  is  partly  a  provision  against 
certain  contingencies.  These  contingencies  may  or  may 
not  arise.  The  breakdown  of  tomorrow  may  be  pre- 
ceded by  no  signs  that  indicate  its  occurrence.  Besides 
obvious  wear  and  tear,  there  are  always  risks — hidden 
it  may  be — but  none  the  less  a  contingency  that  may  be 
either  near  or  remote.  A  prudent  and  conservative 
course  may  demand  a  much  higher  rate  than  would 
seem  necessary  from  the  closest  calculation  of  wear  and 
tear. 

No  uniform  system  is  in  operation  in  various 
plants,  to  provide  for  depreciation.  Even  in  precisely 
,    ,    '  the  same  lines  of  business,  working  under 

Lack  of  ° 

Uniformity  in  substantially  the  same  conditions,  methods 
Systems 

will  be  at  wide  variance  and  still  con- 
sidered satisfactory  by  their  users.  In  one  shop  repairs 
are  given  almost  the  entire  attention,  a  tool  room  is 
maintained  with  several  skilled  operatives  who  devote 
their  entire  time  to  repairing,  renewing,  and  remodeling 
machine  tools,  yet  the  rest  of  the  plant  may  be  left  with 
little  or  no  upkeep,  and  no  provision  whatever  is  made 
for  depreciation.  In  other  cases  repairs  are  neglected 
and  profit  is  rapidly  written  into  a  depreciation  and 
sinking  fund.  These  two  cases  cited  are  extremes  and 
every  gradation  exists  between  them.  Often  when  the 
same  general  plan  is  used  the  percentages  are  radically 
different. 

Blanket  depreciation  of  the  entire  plant,  covering 
buildings,  fixtures,  tools  and  rolling  or  delivery  stock, 


BLANKET    DEPRECIATION  91 

is  not  as  common  as  formerly.      This  method  is  wrong 

in  theory  even  if  it  does  sometimes  work  in  practice. 

As  said  in  a  previous  chapter  of  the  direct- 
simplicity  of 
Blanket  burden  plan  of  allocation  of  factory  cost, 

its  chief  merit  is  simplicity,  with  the 
corresponding  drawbacks.  When  the  application  be- 
comes complex,  the  simple  system  is  liable  to  be  lacking. 
Buildings  and  machinery  not  only  call  for  different 
rates  but  they  are  almost  invariably  subject  to  entirely 
different  management  in  regard  to  repairs  and  upkeep. 
Who  does  not  call  to  mind  a  money-making  plant  the 
buildings  of  which  seem  on  the  verge  of  tumbling  down, 
windows  cracked  and  obscured  with  cobwebs  and  dirt, 
while  within  the  shop  is  every  modern  tool,  kept  in  the 
highest  possible  state  of  efficiency? 

Where  blanket  depreciation  again  fails,  may  be 
seen  when  certain  departments  of  a  plant  are  obliged 
to  work  up  to  their  full  limit  while  other  departments 
are  experiencing  slack  times.  Deterioration  in  one  part 
may  be  double  or  treble  that  in  another. 

Division  of  sunk  capital  into  classes  for  the  reckon- 
ing of  depreciation  must  depend  much  upon  the  scope 
of  the  business.  A  general  manufacturing 
Classification  plant  renting  its  building  would  probably 
need  but  few  divisions  for  this  purpose: 
Fixtures;  fixed  tools  valued  above  |50;  lesser  tools; 
engines  or  motors;  etc.  If  the  plant  were  larger  and 
owned  the  land  and  buildings,  land  and  buildings  would 
be  added.    In  organizing  a  new  business,  preliminary 


92  COST  OF  PKODUCTION 

expenses  of  establishment  may  be  considered  as  subject 
to  an  annual  writing  off.  No  difficulty  will  be  experi- 
enced in  classification  for  depreciation  purposes.  The 
underlying  principles  of  classification  are  so  broad,  that 
even  the  most  elemental  knowledge  of  a  business  will  be 
guide  enough  for  their  application.  Over  against  this, 
however,  is  set  the  difficultly  accompanying  the  proper 
determination  of  rate,  which  calls  for  long  experience 
combined  with  rare  and  exact  business  judgment. 

The  depreciation  or  appreciation  of  land  occupied 
as  a  site  has  already  been  touched  upon  as  coming 

within  the  province  of  revaluation  rather 
Land  or  than  depreciation.    There  may  be  said  to 

be  one  exception,  however.  Fairness  to 
future  stockholders  may  require  that  some  contingency 
be  provided  for  by  writing  off  a  certain  sum  annually. 
Events  may  require  the  removal  of  the  factory  within  a 
certain  period  of  years.  It  would  be  no  more  than  just 
that  depreciation  be  charged  against  the  land  and  not 
leave  the  entire  loss  to  fall  on  the  stockholders  at  the 
time  of  such  removal.  Generally  speaking,  however, 
depreciation  is  not  meant  to  be  charged  against  land. 

The  subject  of  depreciation  ratings  is  one  that  can 
not  be  covered  by  general  formulas.  However,  a  number 
of  examples  are  given  as  used  by  fire  insurance  adjust- 
ers. It  must  be  remembered  these  percentages  are  based 
on  the  actual  life  of  the  building  without  any  repairs ; 
also  that  they  tend  to  liberality  of  reduction  if  any 


BUILDINGS    AND    MACHINERY  93 

bias  exists.  The  following  percentages  are  as  given  by 
Tiffany : 

"Brick  buildings,  slate  or  tin  roofs,  used  as  manu- 
facturing establishments,  where  there  is  heavy  running 
machinery,  especially  when  used  as  planing  mills  and 
for  the  manufacture  of  sash,  doors  and  blinds,  wagons, 
hubs,  spokes,  furniture,  chairs,  and  other  wood  workers, 
depreciate  yearly  to  a  greater  extent  than  those  used 
for  less  hazardous  purposes,  and  a  fair  estimate  on 
these  classes  would  be  annually  4  per  cent.  Frame 
buildings  under  similar  condition  depreciate  5  per 
cent.  With  shingle  or  gravel  roofs,  occupied  for  same 
purpose  as  described,  depreciate  annually  4%  per  cent ; 
if  frame,  6  per  cent." 

When  we  come  to  the  matter  of  machine  deprecia- 
tion, we  have  a  subject  not  only  complicated  in  theory 

but  one  on  which  both  theoretical  and 
Depreciation 
of  practical  authorities  are  at  variance.  And 

there  is  the  best  of  reason  why  such  vari- 
ance should  exist.  Opinions  are  commonly  the  result 
of  experience — and  the  nearer  home  the  experience  came 
to  one,  the  more  positive  such  a  one  will  be  in  their  con- 
victions. Certain  farmers  would  declare  positively  that 
the  life  of  a  self-binder  was  five  years  or  less,  because 
such  had  been  their  experience,  while  others  would  show 
a  five-year-old  machine  scarcely  damaged  and  good  for 
many  years  to  come.  Similarly  differing  reports  would 
be  given  by  managers  having  a  shop  fitted  with  high- 


94  COST  OP  PRODUCTION 

priced,  complicated  machine  tools.  One  would  declare 
that  as  a  result  of  his  experience  that  15  per  cent 
yearly  was  none  too  much  to  write  off,  while  an- 
other would  consider  5  per  cent  yearly,  a  liberal  allow- 
ance. 

Ewing  Matheson,  one  of  the  leading  authorities  on 
the  subject  of  depreciation  says : 

"In  regard  to  the  proper  rate  of  depreciation  for 
machinery,  there  is,  even  in  well-managed  factories  of 
similar  class,  a  wide  divergence  of  practice.  Thus  in  a 
new  factory  doing  a  profitable  business,  private  part- 
ners will,  in  their  desire  to  be  on  the  safe  side,  some- 
times commence  by  writing  off  annually  10  per  cent 
from  machinery  of  all  kinds.  Unless  there  be  some  ap- 
prehension of  the  plant  becoming  obsolete,  this  is  gen- 
erally too  liberal  a  rate  for  fixed  machines,  unless  it  is 
neutralized  in  some  other  way.  In  other  cases,  the 
records  of  many  years'  working  may  show  that  2%  per- 
cent is  sufficient,  because  the  machinery  was  good  in 
kind  and  quality  to  begin  with,  partly  also  because  the 
expenses  of  installation  and  of  liberal  repairs  have  been 
defrayed  out  of  revenue,  and  partly  because  the  ma- 
chines have  been  moderately  worked. 

"In  engineering  factories  the  rate  which  will  prob- 
ably meet  the  deterioration  will  generally  be  found  be- 
tween 5  and  10  per  cent.  Where  the  work  is  of  a  moder- 
ate kind  which  does  not  strain  the  machines  severely, 
and  where  the  hours  of  working  do  not  average  more 
than  sixty  per  week,  5  per  cent  would  generally  suffice 


DEPRECIATION    PERCENTAGES  95 

for  machinery,  cranes,  and  fixed  plant  of  all  kinds,  if 
steam  engines  and  boilers  be  excluded.  Where  there  is 
a  diversity  of  machinery  and  plant,  and  the  past  ac- 
counts of  twenty  years  to  refer  to,  it  is  not  difficult  to 
arrive  at  an  appropriate  rate  and  to  make  periodical 
revisions." 

The  percentages  given  by  Tiffany  are  as  follows : 
"On  all  machinery,  as  a  whole,  including  shafting, 
gearing,  pulleys,  bearings,  and  all  connections,  used  in 
manufacturing  establishments,  such  as  planing  mills, 
furniture  and  chair  factories,  and  other  wood  works, 
there  is  a  considerable  deterioration  in  values,  and  the 
very  best  authorities  regard  as  correct  a  depreciation 
the  first  year  of  12%  per  cent,  and  every  year  there- 
after 10  per  cent.  On  all  machinery  used  in  iron  works 
there  is  an  annual  depreciation  of  6  per  cent. 

"Machinery,  as  a  whole,  in  a  flour  mill,  will  not 
depreciate  in  value  to  as  great  an  extent,  annually,  as 
that  which  is  in  a  wood-working  establishment,  and 
should  therefore  have  a  specific  per  cent  of  deprecia- 
tion. The  following  may  be  relied  upon  as  equitable,  as 
it  is  based  upon  the  experience  of  some  of  the  most  prac- 
tical millwrights  in  the  country :  Machinery  in  a  flour 
mill  will  depreciate  the  first  year,  12%  per  cent;  the 
second  year,  8  per  cent;  the  third  year,  5  per  cent; 
the  fourth  year,  2%  per  cent ;  the  fifth  year,  2  per  cent, 
and  every  year  thereafter,  2  per  cent.  An  engine,  prop- 
erly set  and  under  the  exclusive  charge  of  a  competent 
and  careful  engineer,  will  depreciate  annually  5  per 


96  COST  OF  PRODUCTION 

cent.  The  average  life  of  a  boiler  is  ten  years,  and  the 
annual  depreciation  should  be  10  per  cent. 

"In  giving  the  percentages  of  depreciation  on  en- 
gines and  boilers  it  is  assumed  that  a  careful  and  com- 
petent engineer  is  employed,  and  that  they  are  well 
cared  for.  Where  this  is  not  the  case  the  per  cent  is 
largely  increased,  and  many  cases  have  been  known 
where,  in  less  than  five  years,  they  have  been,  through 
carelessness,  rendered  entirely  useless  and  consequently 
worthless." 

The  matter  of  depreciation  of  drawings  and  pat- 
terns is  one  intimately  connected  with  estimates  and  is 
referred  to  the  topic  "Patterns,"  in  the  chapter  "Esti- 
mates." 

Patents  and  copyrights  theoretically  are  subject  to 
the  regular  depreciation  of  lapse  in  a  term  of  years,  the 
protected  life  of  a  patent  being  17  years  and  of  a  re- 
newed copyright  42  years.  Practically,  however,  the 
depreciation  is  greatly  in  excess  of  the  theoretical  rate, 
because  of  the  danger  of  superseding  inventions  or  copy- 
rights. 

There  are  two  methods  in  wide  use  for  the  calcula- 
tion of  depreciation,  the  first  reckoning  on  the  original 
cost ;  the  second,  on  the  value  after  the  preceding  years' 
depreciation  has  been  deducted. 

Depreciation  has  been  spoken  of  earlier  in  this 
work  as  an  uncertain  factor.  It  is,  and  can  not  be 
made  otherwise.  But  it  can  be  made  a  safe  factor  by 
conservative  writing  off.    To  make  the  percentage  writ- 


CONCLUSION  97 

ten  off  large  enough  to  meet  the  aims  and  protect  the 
welfare  of  the  business  and  yet  not  introduce  too  large 
a  factor  into  Factory  Cost,  so  restricting  the  sales  de- 
partment in  their  battle  for  trade,  calls  for  a  thorough 
knowledge  and  business  technique  granted  but  few. 
This,  however,  is  a  matter  of  education  and  application 
no  more  difficult  than  the  innumerable  problems  that 
are  daily  taken  up  and  satisfactorily  solved  by  practical 
business  men. 
7 


CHAPTER    XI 

SELLING  EXPENSE 

The  factor  coordinate  with  Factory  Cost  is  Sell- 
ing Expense,  the  two  going  up  to  make  Cost  to  Make 
and  Sell.  Selling  Expense  comprehends  six  factors, 
which  will  be  treated  in  detail  hereafter :  (1)  Office;  (2) 
Salesmen;  (3)  Estimating;  (4)  Advertising;  (5) 
Traveling,  and  (6)  Indirect  Expense.  Each  of  these  fac- 
tors lie  well  within  the  limits  of  Selling  Expense,  with 
the  exception  of  (6)  Indirect  Expense,  which  compre- 
hends, or  may  be  made  to  comprehend,  certain  expenses 
which  result  from  or  grow  out  of  administration  in- 
stead of  selling. 

In  the  strictest  sense,  Selling  Expense  forms  no 
part  of  the  cost  of  production.  An  article  is  produced 
when  Factory  Cost  lays  it  down  at  the  works  door. 
But  the  business  man  says:  "I  have  no*  use  for  this 
product  unless  I  can  sell  it.  Production  is  all  right,  but 
it  must  have  added  to  it  the  complement  Selling  Ex- 
pense, in  order  that  I  may  have  a  working  basis."  To 
furnish  this  working  basis,  to  the  cost  to  produce,  or 
Factory  Cost,  is  added  Selling  Expense  and  the  manu- 
facturer knows  as  Cost  to  Make  and  Sell  what  his 
product  stands  him  in  and  he  is  able  to  govern  his  busi- 
ness affairs  accordingly. 

The  functions  of  making  and  selling  call  for  the 

98 


PRODUCTION   AND   SELLING  99 

exercise  of  vastly  different  organization,  methods,  and 
most  of  all,  widely  differing  faculties  of  mind.  The  line 
between  the  two  is  clearly  and  sharply  drawn.  The  con- 
structive mind  is  satisfied  when  the  machine  is  com- 
plete, every  part  working  smoothly  and  ready  to  per- 
form its  individual  functions.  Having  completed  the 
manufacture,  the  engineer  or  mechanic  regards  that 
problem  as  solved  and  calls  his  job  completed  and  turns 
his  attention  to  other  things.  Not  so  does  the  com- 
mercial mind  act.  The  salesman  takes  the  thing  to  be 
sold  and  concerns  himself  alone  with  its  disposal. 
Worth  to  him  is  an  essential  in  so  far  as  it  helps  sales. 

It  is  not  difficult  to  see  from  what  different  view- 
points Production  and  Selling  look  at  the  same  prob- 
lems. Nor  is  it  to  be  wondered  at  that  years  of  life  side 
by  side  have  led  the  one  to  look  upon  the  other  with 
mere  tolerance  if  not  with  misunderstanding,  the  two 
differing  business  divisions  being  linked  together  by 
interest  alone. 

Therefore,  in  practice  as  well  as  in  theory,  there  is 
little  or  no  difficulty  in  separating  the  expense  of  selling 
from  the  expense  of  making.  If  there  be  any  difficulty, 
it  will  usually  concern  some  small  item  which,  dis- 
tributed over  the  entire  cost  of  production,  does  not 
affect  the  results  to  any  material  degree. 

The  allocation  of  Burden  has  been  thoroughly 
taken  up  in  these  pages,  and  it  has  been  shown  that 
there  is  an  existing  relation  between  Burden  and  Prime 
Cost  and  the  elements  of  Prime  Cost,  Material  and 


100  COST  OF  PRODUCTION 

Direct  Labor.  No  such  relation  exists  between  Selling 
Expense  and  any  of  factors  or  elements  of  Factory 
Cost.  The  cost  of  the  commercial  disposal  of  an  article 
has  nothing  to  do  with  the  cost  to  make  it.  The  demand 
may  be  such  that  the  product  is  eagerly  purchased  at 
the  factory  door,  in  which  case  the  only  expenses  are 
few  and  indirect,  giving  rise  to  the  equation,  Factory 
Cost :  Selling  Expense : :  1000 : 1.  On  the  other  hand,  a 
plant  may  be  engaged  in  the  production  of  a  nostrum 
which  requires  that  immense  sums  be  spent  to  further 
the  disposal  of  the  product  when  made,  in  which  case 
the  equation  may  stand:  Factory  Cost:  Selling  Ex- 
pense : :  1 :  1000. 

The  fact  that  there  is  no  existing  relation  between 
Selling  Expense  and  Factory  Cost  does  not  mean  that 
no  means  for  the  distribution  of  the  expense  of  selling 
must  be  provided.  If  Direct  Labor  or  Prime  Cost  is 
made  to  bear  the  burden  of  Selling  Expense,  it  is  a  very 
simple  disposal  of  the  subject,  but  one  having  only  its 
simplicity  to  commend  it.  The  ideal — and  impossible — 
way  would  be  to  have  each  unit  of  product  bear  its  pro- 
portionate burden  of  Selling  Expense  by  being  debited 
for  the  exact  cost  of  selling  it,  but  this  would  call  for 
a  cost  system  so  complicated  that  it  is  hardly  worth 
mentioning  except  by  way  of  illustration.  This  being  in 
the  realm  of  the  impossible,  the  compromise  nearest  cor- 
rect must  be  taken  as  a  basis  of  a  method  for  allocating 
the  expenses  of  selling.  This  gives  a  choice  of  three 
methods  for  the  distribution  of  the  expenses  of  selling : 


DISTRIBUTION  OF  SELLING  EXPENSE    101 

(1)  On  Direct  Labor;  (2)  on  Factory  Cost;  (3)  on 
number  of  hours  required  in  production. 

No  general  statement  can  be  made  as  to  which  of 
these  three  methods  is  preferable.  In  general  manu- 
facturing the  last  method  is  in  successful  use  and  con- 
sidered favorably.  That  the  taking  of  the  number  of 
hours  required  in  the  production  of  a  certain  product 
as  a  basis  for  the  distribution  of  the  cost  of  selling  is  an 
arbitrary  one  must  be  at  all  times  remembered  and  cor- 
responding allowances  made.  The  following  excerpt 
from  an  article  by  A.  Hamilton  Church  in  the  Engineer- 
ing Magazine,  gives  an  excellent  method  of  dealing  with 
this  troublesome  subject: 

"The  most  practical  method  of  correcting  the  errors 
introduced  by  the  artificiality  of  the  basis  of  distribu- 
tion, is  by  means  of  classification  whereby  the  incidence 
which  would  otherwise  fall  equally  on  each  kind  of 
work  is  made  to  fall  unequally.  A  number  of  classes 
are  created,  the  incidence  in  the  first  of  which  is,  say, 
100,  the  incidence  in  the  second  being  120,  that  in  the 
third  and  fourth  perhaps  150  and  170  respectively,  and 
so  on  for  as  many  classes  as  may  be  found  necessary. 
Leaving  aside  for  the  moment  the  considerations  which 
determine  in  what  particular  class  any  given  article 
shall  stand,  it  is  evident  that  if  we  have  a  thousand 
dollars  to  distribute,  the  first  class  will  get  off  lighter 
and  the  last  class  will  be  more  heavily  debited  than  on 
an  ordinary  averaging  plan.  Therefore,  if  any  reason- 
able means  of  classifying  articles  can  be  devised  which 


102  COST  OF  PRODUCTION 

shall  correspond  as  closely  as  possible  to  the  differences 
in  their  commercial  treatment,  the  arbitrary  character 
of  the  original  basis  will  be  to  a  large  extent  minimized. 
There  still,  however,  remains  the  objection  which  must 
never  be  lost  sight  of  when  consulting  the  figures,  that 
an  undue  rise  in  production  cost  will  lead  to  a  dispro- 
portionate absorption  of  general  charges,  in  whatever 
class  the  article  may  happen  to  be. 

"The  process  of  determining  the  classification  is, 
unfortunately,  somewhat  difficult,  or  at  least  demands  a 
good  deal  of  thought  and  care  at  the  outset.  Space  will 
not  permit  of  its  full  treatment  here,  only  the  principle 
followed  can  be  detailed.  Every  item  of  general  charges 
must  be  tabulated.  The  average  annual  cost  of  adver- 
tising, traveling,  drawings,  patterns,  catalogues,  corre- 
spondence department,  cashiers  and  bookkeeping,  man- 
agement, and  all  similar  expenditures  must  be  got  out 
and  arranged  in  columns.  These  are  the  items  of  which 
the  incidence  has  to  be  settled.  Now,  against  these  has 
to  be  placed  each  of  the  different  classes  of  articles 
manufactured,  and  each  one  of  these  has  to  be  carefully 
reviewed  with  relation  to  each  of  the  items  of  expense. 

"Thus,  for  instance,  advertising.  Analysis  of  the  ad- 
vertising expenditure  may  show  that  one  article  has 
practically  no  concern  with  advertising.  Of  this  class 
an  obvious  example  is  repairs  to  the  firm's  own  prod- 
ucts. Other  articles,  on  the  contrary,  may  involve 
special  advertising,  and  should,  of  course,  be  debited 
with  the  whole  of  such  special  expense.    Catalogues  are 


DETERMINATION  OP  INCIDENCE         103 

open  to  similar  analysis.  Such  items,  again,  as  are 
standard  articles  supplied  either  from  stock  or  from 
standard  parts,  involve  much  less  of  the  expenditure 
due  to  correspondence  than  do  special  jobs.  Repairs,  on 
the  other  hand,  although  escaping  the  advertising  debit, 
should  be  visited  heavily  on  the  correspondence  and 
bookkeeping  sections,  since  these  small  jobs  cause  as 
much  work  to  these  departments  as  do  standard  orders 
of  fifty  or  a  hundred  times  their  value.  From  this  brief 
description  it  will  be  seen  that  the  general  establish- 
ment charges  are  capable  of  a  very  detailed  analysis. 
It  is  true  that  the  element  of  judgment  is  very  strongly 
involved  in  this  analysis,  but  there  is  a  difference  be- 
tween judgment  and  mere  guesswork.  There  is  no  rea- 
son why  a  very  close  approximation  to  facts  should  not 
be  made  at  this  stage  if  the  work  is  carried  out  by  a 
competent  person,  who  has  access  to  all  the  data  neces- 
sary for  decision." 

It  will  be  seen  that  the  success  or  failure  of  this 
system  lies  in  the  ability  to  fix  and  maintain  a  satis- 
factory percentage  of  incidence.  This  once  found  and 
understanding^  applied,  the  system  does  what  no  other 
method  does,  distributes  the  selling  burden  where  it 
logically  and  of  right  belongs.  Those  classes  which  call 
for  heavy  selling  expenses  have  such  expense  duly  al- 
lotted to  them;  classes  which  require  little  selling  ex- 
pense are  treated  accordingly. 

To  sum  up :  The  cost  of  production  is  obviously 
not  satisfactorily  indicated  unless  first,  Prime  Cost, 


104  COST  OF  PRODUCTION 

Factory  Cost,  and  Selling  Expense  are  sharply  differ- 
entiated from  each  other;  second,  Burden  and  Selling 
Expense  are  correctly  distributed.  The  second  con- 
tingency is  even  more  important — if  the  proportion  be 
large — than  the  first,  and  is  to  be  provided  for — as  are 
similar  problems  in  costs — by  the  adaptation  of  the 
best  method  to  the  problem  in  hand. 


CHAPTER    XII 

THE   FACTORS  OF  SELLING  EXPENSE 

The  elements  making  up  Selling  Expense  have  been 
given  as  (1)  Office;  (2)  Salesmen;  (3)  Estimates;  (4) 
Advertising;   (5)  Traveling;  (6)  Indirect  Expense. 

By  office  expense  is  meant  the  outlay  necessary  for 
the  maintenance  of  a  selling  office.  Theoretically  such 
an  institution  should  concern  itself  solely 
Expense  with  d*sPosal  °f  *ne  manufactured  prod- 

uct, but  often  times  a  part  of  office  ex- 
pense, particularly  that  relating  to  correspondence, 
would  strictly  be  chargeable  to  other  elements.  No 
difficulty,  however,  will  be  experienced  with  the  calcula- 
tion and  apportionment  of  this  element. 

Salesmen  or  sales  expense  contributes  largely  to 
the  expense  of  selling.  It  is  usual  to  open  an  account 
with  each  man  and  keep  a  careful  record  of  the  sales 
in  his  territory.  The  record  shows  the  ratio  of  sales 
expense  to  each  dollar  of  product  disposed  of  and  the 
relative  worth  of  the  salesman  and  the  territory  as 
well.  The  determination  of  all  amounts  and  percent- 
ages relating  to  salesmen's  expense  is  an  easy  matter 
for  the  accountant  and  one  very  essential  to  the  finding 
of  costs. 

An  estimate  is  the  probable  cost  of  a  product  as 
calculated  from  the  best  information  obtainable,  also, 

105 


106  COST  OF  PRODUCTION 

the  figures,  tables,  and  accessory  drawings  made  up  to 

show  cost  or  other  specifications.    The  ordinary  esti- 
mate is  a  selling  expense  and  chargeable 

Estimates— 

to  What  as  such.   A  certain  job  is  required  and  the 

Chargeable 

specifications   therefor — usually  more  or 

less  imperfect — are  drawn  up  by  the  prospective  buyer. 
The  manufacturer  verifies  and  often  works  out  the 
specifications  in  greater  detail  and  submits  his  price. 
Often  the  same  specifications  are  submitted  by  the 
buyer  to  several  firms,  to  one  of  which  he  awards  the 
contract.  This  is  a  plain  example  of  a  case  where  such 
estimates  are  Selling  Expense,  as  they  are  made  to 
further  the  sale  of  a  product. 

Estimates  may  call  for  drawings,  and  when 
filled  for  patterns  or  rarely  for  special  machinery.  The 
rule  covering  special  expense  incurred  in  manufactur- 
ing a  certain  machine  or  product  is  a  general  one  and 
may  be  embodied  in  the  following  words:  When  esti- 
mates, drawings,  or  the  like  are  made  to  further  a  sale 
not  made,  debit  Selling  Expense;  when  the  sale  is 
effected  such  charge  may  be  made  against  the  indi- 
vidual job,  providing  the  outlay  is  of  no  more  use  after 
the  job  is  completed;  if  the  estimates,  drawings,  etc., 
are  to  be  continued  in  use  for  future  jobs  they  should 
be  considered  a  part  of  Plant  Equipment  and  charge- 
able as  such.  This  rule  is  of  particular  use  in  drawing- 
room  estimating.  It  is  a  rare  occurrence  that  patterns 
are  made  up  for  a  contract  not  yet  awarded,  but  esti- 
mates and  drawings  are  often  made  up  as  in  competition 


ADVERTISING  107 

for  a  contract.  If  the  business  is  such  that  all  estimates 
and  drawings  are  similar,  the  loss  will  not  be  great,  as 
duplicates  may  be  used  in  bidding  for  another  job.  But 
in  many  manufacturing  plants,  the  output  has  a  wide 
range  and  two  machines  exactly  alike  may  never  be 
made.  It  is  upon  plants  of  this  last  class  that  expenses 
for  estimates  and  drawings  fall  the  heaviest.  There  are, 
as  in  other  divisions  of  the  subject  of  costs,  widely  dif- 
fering methods  of  treating  these  charges,  but  the  above 
rule  will  be  general  enough  to  cover  all  cases  which 
may  arise. 

The  element  Advertising  is  a  selling  expense  in  one 
sense  and  in  another  sense  an  investment.       A  firm 

manufacturing  furniture,  let  us  say,  finds 
Advertising 
and  they   have  on   hand  several   typewriting 

machines  for  which  they  have  no  use. 
They  expend  the  sum  of  ten  dollars  for  advertising  to 
dispose  of  the  machines.  Such  advertising  is  an  ex- 
pense; they  bought  so  much  space  in  an  advertising 
medium,  the  typewriting  machines  are  disposed  of,  and 
there  is  an  end  to  the  transaction.  Now,  this  same  fur- 
niture firm  may  spend  ten  thousand  dollars  in  one  sea- 
son for  publicity — to  get  their  name  prominently  be- 
fore the  public.  The  seed  thus  sown  may  accelerate 
trade  for  a  decade — for  several  decades,  it  may  be.  A 
great  part  of  such  advertising  is  in  the  nature  of  an 
investment.  It  creates — or  aids  in  creating — a  valu- 
able asset,  Good-will,  which  is  possibly  worth  more  than 
the  remainder  of  the  plant.    This  is  generally  the  case 


108  COST  OF  PRODUCTION 

where  the  good-will  carries  with  it  the  right  to  use 
some  widely  known  trade-mark  or  trade  name.  In 
charging  off  advertising  expense  a  medium  ground  is 
advisable.  A  certain  percentage  of  general  advertis- 
ing is  an  expense  and  chargeable  as  such ;  the  remainder 
goes  toward  the  purchase  of  Good-will,  an  asset  of  the 
plant.  No  general  rule  can  be  given  for  the  ratio  exist- 
ing between  these  two  parts.  Indeed  two  persons  hav- 
ing the  same  knowledge  of  and  experience  in  the  same 
business  would  have  widely  varying  views,  depending 
upon  the  sanguineness  with  which  each  looked  upon 
the  future.  One  might  hold  that  a  certain  sum  had 
been  expended  and  the  actual  results  from  such  ex- 
penditure were  so  many  dollars;  the  other  might  as 
truly  say  that  results  would  come  in,  directly  and  in- 
directly for  a  long  term  of  years.  A  compromise  view 
places  faith  in  the  actual  experience  of  the  past  as  a 
guide  to  the  future  and  is  neither  too  sanguine  nor 
severe  and  proportions  the  expense  and  investment  ac- 
cordingly. 

Traveling  expense  may  be  variously  classified. 
Transportation  used  by  salesmen  is  usually  charged  to 
an  account  so  as  to  furnish  a  basis  for 
Expense^  determining  the  ratio  of  expense  to  sales. 

Traveling  done  in  the  interest  of  the  com- 
pany may  be  either  a  legitimate  selling  expense,  an  ad- 
ministrative expense  or  a  perquisite  of  an  official,  but 
generally  is  chargeable  to  Selling  Expense. 

Indirect  Expense  includes  the  salaries  of  officers 


INDIRECT  EXPENSE  109 

and  directors  not  chargeable  as  Direct  Labor  or  Profit, 
various  other  minor  expenses  not  chargeable  elsewhere. 

Besides  these,  there  are  constantly  corn- 
Expense  ing  UP  extra  concessions,  as  free  repairs, 

special  discounts  for  cash  on  installment 
or  overdue  debts,  etc.,  which  might  be  termed  Doubtful 
Debt  Reserve.  For  instance,  a  buyer  who  has  always 
had  an  Al  reputation  purchases  a  bill  of  goods  on 
ninety  days'  time.  The  collector  for  that  territory 
learns  he  is  in  financial  difficulty  and  accepts  75  per 
cent  of  the  face  of  his  account  not  yet  due,  for  a  cash 
payment. 

No  general  rule  can  be  given  as  to  what  items  are 
to  be  included  in  Indirect  Expense.  These  expenses  dif- 
fer greatly  in  different  businesses  and  vary  widely  in 
amount  in  the  same  business  at  different  times.  The 
tendency  to  dispose  of  doubtful  items  by  placing  under 
Indirect  Expense,  should  be  carefully  guarded  against. 
to  _  _  While  nothing  is  so  fatal  to  the  worth  of 

No  Rule 

for  a  cost  system  as  an  endless  hair  splitting 

Direct  Expense 

over  the  technicalities  of  the  higher  mathe- 
matics of  bookkeeping,  yet  the  other  extreme,  the 
making  of  General  Expense  or  Indirect  Expense  a 
catch-all  for  the  accumulative  odds  and  ends  of  ex- 
pense, is  to  be  just  as  strongly  guarded  against.  The 
lines  between  Prime  Cost,  Burden  and  Selling  Expense 
kept  sharply  in  mind,  there  should  be  no  great  difficulty 
in  deciding  to  which  of  the  three  main  groups  of  great 
expenses  an  item — however  obscure — belongs. 


110  COST  OF  PRODUCTION 

With  the  element  Indirect  Expense,  we  come  to  the 
last  constituent  of  the  factor,  Cost  to  Make  and  Sell. 
This  factor  is  the  real  objective  point  of  the  science  of 
costs.  This  once  determined,  the  calculation  of  the  re- 
maining factors  is  a  matter  of  simple  arithmetic. 


CHAPTER    XIII 

PROFIT 

Profit,  in  the  science  of  costs,  is  the  excess  of  the 
selling  price  over  the  cost  of  making  and  selling.  This 
meaning  of  profit  is  not  to  be  confounded  with  the 
meaning  in  political  economy,  which  is,  "what  is  left  of 
the  product  of  industry  after  deducting  the  wages,  the 
price  of  raw  materials,  and  the  rent  paid  in  the  produc- 
tion, and  is  considered  as  being  composed  of  three  parts 
— interest,  risk  or  insurance,  and  wages  of  superintend- 
ence." 

In  the  preceding  chapter  it  was  said  that  the  ob- 
jective point  in  the  science  of  costs,  is  the  Cost  to  Make 
and  Sell.  The  objective  point  in  a  business,  however,  is 
Profit.  There  can  be  no  exact  definition  of  Profit,  for 
the  only  terms  in  which  it  is  definable  are  relative. 
What  would  be  a  profit  in  one  business  would  be  a  loss 
in  another ;  what  shows  as  a  profit  in  the  bookkeeping 
of  a  corporation  may  be  a  loss  disguised  at  the  expense 
of  some  other  constituent  element  of  cost.  Upon  the 
accuracy  of  the  determination  of  the  intermeshing  fac- 
tors depends  the  worth  of  what  the  books  declare  a 
profit. 

It  has  been  previously  stated  in  these  pages  that 
Profit  comprehends  and  must  take  care  of  Interest, 


111 


112  COST  OF  PRODUCTION 

Discount,  Rent,  if  the  plant  owns  the  buildings,  and 

like  charges.     There  are  two  prime  reasons  for  this. 

First,  these  items  are  a  part  of  the  price 
Profit  Compre- 
hends other       which  the  buyer  pays,  but  can  not  be  said 

to  be  a  part  either  of  warehouse  cost  or 
inventory  valuation.  Second,  in  these  days  of  high 
finance,  the  amount  of  capital  of  a  company  may  bear- 
one  of  many  ratios  to  the  amount  actually  paid  in,  so 
by  placing  interest  payments  on  stocks  and  bonds  as  a 
part  of  profit,  no  matter  what  the  apparent  ratio  of 
capital  is  to  cash  paid  in,  it  is  disposed  of  equitably. 

A  third  objection  is  given  by  F.  A.  Halsey,  in  a 
lecture  given  before  the  mechanical  engineering  stu- 
dents of  Cornell  University : 

"There  is  one  item  which  is  usually  included  in  the 
burden,  which  it  does  not  cover,  and  which  occupies 
very  debatable  ground.  I  refer  to  the  item  of  interest 
on  the  value  of  the  tools  and  plant,  which  is  usually 
added  to  an  allowance  for  the  depreciation  due  to  wear 
and  tear,  the  sum  being  treated  as  a  single  item  called 
Interest  and  Depreciation.  Of  the  correctness  of  the 
depreciation  charge  there  is  no  doubt,  but  as  much  can 
not  be  said  for  the  interest  charge.  I  am  not  prepared 
to  condemn  this  practice  outright,  but  it  is  necessary 
that  its  questionable  nature  be  shown  as  well  as  the 
fact  that  those  who  advocate  it  have  at  least  a  case  on 
their  hands  to  defend,  and  that,  even  if  their  principle 
is  right,  their  practice  is  usually  wrong.  This  charge 
as  usually  made  is  in  flat  defiance  of  the  fundamental 


INTEREST— WHERE   CHARGEABLE       113 

principle  of  modern  bookkeeping — that  is,  double  entry 
bookkeeping.  I  refer  to  the  principle  that  every  trans- 
action and  every  charge  of  whatever  nature  must  ap- 
pear on  the  books  as  a  transaction  between  two  indi- 
viduals— fictitious  or  real,  as  the  case  may  be;  that  is, 
there  must  be  no  charge  without  a  corresponding  credit. 
Now,  against  this  interest  charge  there  is  nowhere,  on 
any  book,  in  gross  or  detail,  directly  or  impliedly,  any 
credit  whatever.  It  is  simply  lugged  in  bodily  from 
nowhere.  If  the  principle  is  right,  there  is  certainly  a 
screw  loose  somewhere  in  its  application." 

Speaking  further  on  the  same  subject,  Mr.  Halsey 
says :  "There  is  one  argument  in  favor  of  charging  the 
interest  on  the  cost  of  the  tools  which  has  weight,  even 
if  in  principle  the  practice  be  wrong.  The  placing  of 
the  interest  charge  in  the  allowance  for  profit  means 
that  it  is  necessarily  added  as  a  flat  percentage,  which 
ignores  the  different  values  of  the  tools  on  which  the 
work  is  done.  The  importance  of  making  the  more  ex- 
pensive tools  carry  their  fair  proportion  of  the  burden 
is  so  great,  and  so  many  influences  exert  themselves 
against  it  that  it  may  be  fairly  argued  that  to  accom- 
plish this,  the  interest  charge  should  be  placed  on  the 
tools,  but  if  this  is  done,  cross  entries  between  the 
ledger  accounts  should  be  made  in  such  a  manner  as  to 
relieve  the  interest  and  discount  account  of  the  amounts 
charged  against  the  tools.  I  am  not  aware  that  this 
has  ever  been  done  [this  in  1901],  but,  nevertheless,  the 
common  practice  can  not  be  defended.    By  no  possible 

8 


114  COST  OF  PRODUCTION 

argument  can  a  double  charge  for  the  same  item  be 
justified." 

For  the  various  reasons  given  above  and  for  numer- 
ous other  minor  reasons,  it  seems  logical  and  in  keeping 
with  the  science  of  costs  as  now  practiced,  to  include 
the  interest  group  of  elements  in  Profit.  Profit  then 
takes  care  of  the  investment  in  its  entirety  and  if  the 
stock  be  heavily  watered  does  not  throw  as  an  expense 
upon  Burden  a  load  which  it  should  not  be  made  carry. 

Profit  is  related  so  intimately  with  the  three  ele- 
ments Depreciation,  Upkeep,  and  Sinking  Funds,  that 
there  may  be  said  to  be  a  qualifiedly  fixed  ratio  existing 
between  them.  As  an  extreme  case,  let  us  take  a  get- 
rich-quick  plant.  Suppose  this  plant  to  be  outfitted, 
running,  and  doing  what  would  be  conservatively  called 
a  good  business.  Their  normal  profits  would  probably 
be  8  per  cent  on  the  capital  invested.  But  the  pro- 
moters have  other  plans.  Only  such  repairs  as  are  ab- 
solutely necessary  are  made,  depreciation  charges  are 
marked  down  to  a  minimum  or  disregarded  altogether, 
no  sinking  fund  is  maintained  and  a  dividend  of  per- 
haps 20  per  cent  is  declared.  It  is  evident  that  12  per 
cent  has  been  misappropriated  and  if  the  same  course 
is  continued  that  this  percentage  will  have  to  be  re- 
turned by  means  of  assessments  or  the  business  will 
eventually  have  to  close. 

At  the  other  extreme  the  ultra-conservative  man- 
ager stickles  for  a  large  sinking  fund,  keeps  in  repair 
the  entire  plant,  extending  it  wherever  efficiency  de- 


CONCLUSION  115 

mands  and  then  trims  down  to  the  lowest  possible  per- 
centage the  annual  dividend  to  stockholders,  on  the 
theory  that  dividends  paid  out  are  out  of  the  control  of 
the  management. 

These  two  types  present  the  two  extremes  of  man- 
agement, and  it  is  safe  to  say  there  is  every  grade  be- 
tween them. 

The  amount  of  profit  depends,  therefore,  taken 
aside  from  the  question  of  business  management,  upon 
the  sums  allotted  to  related  elements. 

With  Profit  is  reached  the  final  element  entering 
into  the  cost  of  production.  Selling  Price,  comprehend- 
ing all  the  elements  previously  treated  is  of  relatively 
small  concern  as  compared  with  those  constituent  ele- 
ments. Indeed  it  may  be  said  that  one  having  a  grasp 
on  Material,  Labor,  Depreciation,  and  Selling  Expense 
is  a  long  way  on  the  road  to  a  thorough  understanding 
of  the  science  of  costs. 


PART    II 

ILLUSTRATIVE  COST  SYSTEMS 


117 


CHAPTER    XIV 

rA  FACTORY  COST  SYSTEM 

BY  EDRIC  C.  WARREN, 

General  Manager  and  Secretary  of  the  Century  Stove  and 
Manufacturing  Company 

The  first  points  in  importance  in  factory  cost  sys- 
tem are  the  factory  records.  These  should  be  simple, 
and  should,  with  as  little  detail  as  possible,  accomplish 
the  results  striven  for.  With  the  system  here  shown, 
every  hour  of  labor  is  accounted  and  paid  for  on  some 
order  or  in  non-productive  labor. 

This  system  uses  two  time  sheets,  the  first  being 
the  simplest  form  that  it  is  possible  to  use.  On  this 
the  workman  indicates  his  time,  the  card  being  known 
as  the  workman's  check. 

Figure  I  shows  the  form  filled  out  by  the  foreman 
from  the  workman's  check.  This  check  is  not  illus- 
trated, as  any  form  which  has  blanks  for  the  workman's 
time  will  be  sufficient.  It  may,  of  course,  be  made  as 
comprehensive  as  desired. 

Figure  II  is  a  requisition  blank,  which  is  used 
by  the  foreman  for  material  wanted.  Another  form  is 
used  by  the  stockkeeper,  and  follows  material  from  the 
stockroom. 

Figure  III  and  the  carbon  copies  made  from 
it  are  the  order  sheets,  the  original  of  which  is  kept 

119 


120 


COST  OF  PRODUCTION 


in  the  office.  As  many  carbon  copies  of  Figure  III 
are  made  as  there  are  departments  through  which  this 
order  must  run.  These  forms  cover  all  the  business 
that  is  done  in  the  cost  system. 

To  get  a  practical  demonstration  of  its  operation, 


TlMt  SHEET 

>                         * 

CENTURY  STOVE  AND  MANUFACTURING  CO. 

,  OATt  ■■,!■«».■«■  in  r ,    n     ••© 

NWM 

NO.  Or 

>PIHATIO« 

MICI 

TOT* 

L 

Fig.  I 

we  will  follow  an  order  through  the  factory.  The  requi- 
sition for  the  order  is  furnished  by  either  the  superin- 
tendent or  the  manager,  and  the  number  of  copies  which 
are  required  for  the  factory  are  specified  on  the  order 
requisition.  The  clerk  makes  out  this  order,  sends  the 
duplicate  order  sheets  to  the  superintendent,  files  the 


EDRIC    C.   WARREN 


121 


white  office  copy  in  book  marked  "uncompleted  costs," 
makes  a  card  index  for  the  order  number,  and  indicates 
of  what  it  consists.  The  duplicates  of  this  order  are 
then  distributed  to  the  different  department  foremen 
through  whose  hands  the  order  must  pass. 


REQUISITION 


FOR  ORDER  NO. 


OATC  ...... .... 


..  ISO  .... 


Fig.  n 

All  raw  material  is  stored  in  a  warehouse ;  no  ma- 
terial is  carried  in  the  factory  except  such  as  has  been 
requisitioned  for  some  order  number.  Sheet  metal  work 
and  machine  work  are  made  up  on  special  orders,  and 
the  cost  is  obtained  on  this  part  of  the  work.  The  fore- 
man, who  starts  the  order,  orders  the  material  on  Fig- 


122  COST  OF  PRODUCTION 

ure  II  from  the  stockkeeper,  and  furnishes  each  man 
who  goes  to  work  on  the  order  with  his  required  card, 
with  the  check  number  of  the  order  in  its  proper  place. 
This  slip  is  turned  in  to  the  foreman  when  the  job  is 
completed  or  at  the  end  of  the  day.  The  foreman  fills 
out  the  office  time  sheet,  Figure  I,  from  the  several 
time  sheets  which  have  been  turned  in  by  the  work- 
men during  the  day.  Figure  I  is  then  turned  in  to  the 
office. 

Labor  is  figured  by  the  clerk,  and  entered  under  the 
proper  order  number  in  the  columns  marked  "Labor 
from  Time  Sheets."  When  the  stockkeeper  has  filled 
out  Figure  II,  on  which  he  places  the  weight  or  count, 
it  is  returned  to  the  office  and  entered  under  the  head 
"Material"  against  the  proper  order  number.  Com- 
pleted parts,  bolts,  and  other  small  fittings,  which  are 
used  in  common  and  are  not  ordered  for  any  particular 
order  number,  but  are  kept  in  stock  in  the  factory,  are 
placed  on  the  foreman's  order  in  the  column  marked 
"Material  Used,"  which  is  not  shown  on  requisition 
blanks.  As  soon  as  foreman  is  through  with  his  work 
on  any  order  he  returns  his  blank  to  the  office,  marked 
"Completed."  When  all  blanks  have  been  returned  to 
the  office  the  costs  may  be  estimated  very  quickly  and 
accurately.  The  hardest  problem  with  which  the  com- 
pany has  to  contend  is  the  matter  of  non-productive 
cost.  It  has  finally  adopted  the  plan  of  keeping  track  of 
this  item  of  cost  from  the  time  sheets  for  the  two  weeks, 
and  the  percentage  which  this  amount  is  of  the  whole 


. 

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124  COST  OF  PRODUCTION 

payroll  is  the  percentage  which  is  used  as  the  basis  of 
the  non-productive  costs  on  all  cost  sheets  which  are 
estimated  during  the  succeeding  two  weeks. 

When  the  cost  sheets  are  completed,  they  are  placed 
in  a  binder,  marked  "Completed  Costs." 


CHAPTER    XV 

REGARDING  FACTORY  COSTS 

BY  L.  A.  ELY 

Almost  any  progressive  manufacturer  will  admit 
that  few  items  concerning  the  expense  of  the  business 
are  of  such  vital  importance  as  the  knowledge  of  the 
cost  of  articles.  Yet  many  of  these  same  manufacturers 
merely  estimate  the  cost  of  production  on  many  articles 
when  they  determine  the  selling  price. 

To  what  records  do  firms  and  corporations  which 
are  considered  progressive,  and  which  have  an  almost 
perfect  system  in  all  other  departments,  resort  when 
this  most  important  of  all  departments  is  being  con- 
sidered? Their  lack  of  information  is  astonishing,  as 
the  only  way  in  which  to  settle  on  the  selling  price  of 
a  manufactured  article  is  to  first  arrive  at  the  actual — 
the  estimated — cost  of  production. 

The  writer  of  this  chapter  has  endeavored  not  only 
to  devise  a  plan  for  factory  costs  but  to  illustrate  it  as 
well,  and  to  arrange  its  adaptability  to  any  manufac- 
turing firm. 

Attention  is  called  first  to  the  illustrations.  It  will 
be  noted  that  the  forms  shown  may  be  arranged  for 
either  the  typewriter  or  the  autographic  manifolder, 
on  a  regular  padded  form,  inasmuch  as  that  the  entered 
order  bears  the  date  of  entry.  By  this  system  such  firms 

125 


126 


COST  OF  PKODUCTION 


as  care  to  embody  their  stock  order  in  the  same  list 
with  their  shop  orders  may  do  so.  Others  may  with  but 
little  additional  time  and  expense  operate  independent 
sets. 


31 


TV  MfrfHnJ  Sr»™  O^  t  SH0P  QRPER  »  BBEM3JM 


2/JS 


Own  Orocr  No.  0602 

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/ 


n 


MATtAlAL 

LM. 

! 

SHOP     n*tm**-"**tP0mrovmrn*w*nt*o,"**:t*lf  nUCD.   TMCJH 
3  H  UP     scwp  ^  tNWWWO  room. 


FIG.  I 


When  made  out  in  triplicate,  the  shop  order  (Fig- 
ure I)  goes  directly  to  the  shop  foreman.     On  it,  as 


L.   A.    ELY 


127 


soon  as  the  work  is  finished,  he  checks  the  items  and 
enters  a  memorandum  of  the  material  used,  with  such 
other  notations  as  may  be  required.    Then  it  is  sent  to 


The  MkhoJnd  System  Co.  ^S^SSSSSSJt^ 

CORM 

uS  / 

,Ou«  Ohom  No.  9602         MM*  ^.iA£..wm^^tf.L.mA.. 
solo  frY  &Q  A&frt+f. «oto  •»  „4L*J±£L.„... 

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INSTRUCTIONS 


NOTICE 


check  su.  itcmsjOS  sho#  in  coc  «~"o- 

CHCCK  ALL  ITEMS  AS  PACKED  IN  COL.  8— "V- 


FIG.  II 


the  shipping  room,  where  it  takes  in  return  a  receipt 
for  the  articles  which  accompany  the  order. 

The  second  of  the  triplicate  orders  (Figure  II) 


128  COST  OF  PRODUCTION 

goes  directly  to  the  shipping  room,  where  it  is  filed  in 
a  suitable  drawer  until  the  form  from  the  shop,  which 
bears  the  consecutive  number,  is  presented,  when  the 
material  is  listed  and  priced.  Then  it  is  properly 
checked  as  packed  for  shipment,  and  if  shipped  the  bill 
of  lading  is  attached  and  it  is  returned  to  the  office, 
where  it  is  filed  alphabetically  or  attached  to  the  orig- 
inal correspondence  in  the  vertical  file. 

When  the  order  is  received,  the  third,  or  duplicate, 
is  at  once  placed  in  the  unfilled  order  file,  where  it 
remains  until  the  return  to  the  office  of  the  other  forms 
which,  as  has  been  explained,  go  to  the  workshop  and 
to  the  shipping  room.  Then  the  data  from  the  other 
forms  are  added  and  the  invoice  is  made  according  to 
the  price  and  terms  as  sold,  and  the  sheet  is  entered  by 
consecutive  numbers  on  a  post  binder  and  a  card  made 
out  and  indexed  to  the  name  of  the  person  to  whom  the 
article  is  shipped.  On  each  of  these  sheets  appears  the 
number  of  the  ledger  page  to  which  the  transaction  has 
been  posted,  or  a  small  card,  filed  alphabetically, 
records  the  proper  file  of  the  sheets  and  the  history  of 
the  case. 

Should  it  be  desired  the  reverse  of  the  card  or  slip 
is  used  as  a  history  record,  and  the  printed  farm  is 
printed  to  suit  the  conditions.  Spaces  may  be  arranged 
for  a  number  of  workmen.  Proper  dates  could  be 
printed  at  the  top  of  the  card  or  form,  under  which  en- 
tries could  be  made  from  the  time  checks  of  the  work- 
men engaged  on  any  particular  job. 


L.   A.    ELY  129 

The  running  expenses  of  the  factory  should  be  en- 
tered on  this  card  according  to  some  agreed  basis  of 

An  Accurate  cost>  af ter  that  Q1168^011  nas  received  care- 
Method  of  De-  fui  consideration,  or  data  furnished  by  the 
termining 

Expense  several  foremen,  but  in  no  case  should  esti- 

mate be  made  a  basis.  The  items  of  running  expense 
in  every  instance  should  be  printed  on  the  card  or  form. 
The  usual  material  used  on  jobs  could  also  be  printed, 
provided  small  spaces  are  left  for  the  writing  in  of 
special  items,  which  might  only  be  called  for  at  odd  in- 
tervals. The  number  of  men  and  days,  as  well  as  the 
list  of  items,  will  all  have  to  be  considered  in  making 
up  the  size  of  this  card.  If  used  in  the  manufacturing 
of  machinery  or  farming  implements,  much  more  space 
will  be  required  for  the  entries  than  if  the  system  is  to 
be  used  in  the  millinery  or  carpet  department  of  a  store. 

These  items  are  entered,  extended  and  totaled. 
Then  the  other  incidental  expenses,  such  as  crating, 
boxes,  drayage,  freight  allowance,  and  other  items  of 
expense,  with  commissions  if  sold  on  that  basis,  are 
added.  This  made  into  one  total  gives  a  very  close  cost 
price  for  that  job,  which  may  be  said  to  be  the  net  cost. 
Then,  if  the  selling  or  contract  price  be  added,  there  is 
a  compilation  of  facts  that  leaves  no  question  for  the 
manager  or  owner  to  ask  when  he.  figures  on  a  similar 
piece  of  work. 

Then,  if  to  this  compilation  be  added  remarks  giv- 
ing any  special  matter  relating  to  the  working  out  of 
9 


130  COST  OF  PRODUCTION 

that  job  any  peculiarity  in  management,  it  is  of  incal- 
culable value  to  a  firm  in  future  estimates. 

Again,  a  firm  may  have  the  idea  that  a  certain  set 
of  men  are  wasting  time  or  material.  This  system  pre- 
sents a  means  of  accurately  getting  at  the  truth  of  the 
matter  by  setting  two  gangs  of  men  at  the  same  job. 
That  will  force  a  comparison  of  time  and  material  re- 
quired to  produce  any  given  result. 

The  elasticity  of  this  system  admits  of  its  adapta- 
tion to  any  line  of  manufacturing  with  beneficial  re- 
sults. 


CHAPTER    XVI 

THE  COST  OP  WOOD  WORKING 

In  this  chapter  the  desire  is  to  present  for  the  con- 
sideration of  manufacturers  a  system  which  will 
simplify  the  keeping  for  ready  reference  the  cost  of  the 
manufacture  of  any  article  or  set  of  articles.  While  a 
wood-working  plant  is  under  specific  discussion,  it  is 
merely  by  way  of  illustration  and  it  can  readily  be  seen 
that  the  principles  involved  may  be  carried  into  any 
line  where  system  is  desired  and  with  the  same  satis- 
factory results. 

It  matters  little  what  the  nature  of  the  article  may 
be,  all  goods  manufactured  should  be  constructed  from 

blank  orders  which  should  be  furnished 
Orders  *°    the    foreman    of    each    department 

through  which  an  order  passes.  The  form 
suggested  for  this  purpose  (Figure  I)  may  be  adapted 
to  varied  requirements.  At  the  completion  of  a  part  of 
the  order  in  any  department  it  receives  the  O.  K.  of  the 
foreman,  and  is  sent  along  to  the  next  department,  and 
so  on  until  the  work  is  finally  ready  for  delivery.  This 
enables  the  office  to  learn  at  any  time  the  exact  position 
of  the  order  without  searching  through  the  factory  for 
the  desired  information.  The  endorsement  of  the  last 
foreman  having  charge  of  the  work  should  also  include 
the  date  of  the  completion  of  the  order. 

131 


132  COST  OF  PRODUCTION 

If  the  order  is  one  necessitating  its  transfer  from 
one  department  to  another  on  trucks,  then  each  truck 
should  bear  a  job  ticket  or  tag  on  which  should  be  en- 
tered the  order  number  and  the  name  of  the  article  to 
be  manufactured.  The  tickets  should  in  all  cases  ac- 
company the  order,  the  number  of  which  could  at  all 
times  be  told  by  the  workman  detailed,  and  foremen 
should  be  instructed  to  refuse  to  receive  any  job  from 
another  department  without  the  ticket  attached. 

One  of  the  essential  points  in  the  cost  of  the  manu- 
facture of  an  article  is  the  time  a  workman  consumes 
in  its  construction;  often  it  is  of  far 
Cards  greater  importance  than  the  actual  cost  of 

material.  In  order  to  properly  arrive  at 
that  point  the  adoption  of  a  time  card  is  suggested. 
This  card  may  be  printed  in  the  form  of  the  dial  of  a 
clock  (Figure  II).  This  plan  is  suggested  for  the  rea- 
son that  the  most  illiterate  workman  is  able  to  tell  time, 
and  his  only  task  need  be  to  place  a  cross  in  the  hour 
when  he  begins  work  on  an  order,  and  another  when  it 
passes  from  his  hands.  Thus  the  exact  time  required 
for  the  work  in  each  department  through  which  it 
passes  may  be  at  once  determined.  Different  forma 
should  be  provided  for  each  department,  as  they  differ 
in  the  operation,  but  each  should  retain  these  chief 
points:  (1)  The  order  number;  (2)  job  number;  (3) 
date  commenced;  (4)  date  finished;  (5)  name  or  check 
number  of  workman;  (6)  number  of  pieces  and  the 
name  of  the  article.    Cards  for  the  various  departments 


COST  OF  WOOD  WORKING  133 

would  have  the  possible  operations  printed  along  the 
side  of  the  card.  The  idea  which  it  is  wished  to  con- 
vey will  be  found  illustrated. 

These  time  cards  should  be  deposited  in  pockets 
attached  to  each  machine  and  should  be  numbered  ac- 
cording to  the  machine  number  in  order  to  prevent  con- 
fusion.   Then  when  a  workman  starts  a  job  he  has  but 


OROCR  MO. 

*HOP  O«0ER 

*MOP  ORDER  NO.' 

TO 

-^253t*s 

FOREMAN 

■JD&£r£z£\ 

OCTT 

MAtt 

&00  *  st/?r>U4X*-  *d^£<r  ^jr^"  - 

2      j* 

WHEN  COMPLETED  Of'VCII  TO 

DATE  OF  ORDER 

4>ATC  BECA* 

-  pA,TC_riWSHEO>.- 

,wr 

FIG.  I 


to  enter  the  job  number  on  a  card  and  cross  the  time 
when  he  commences  his  work.  The  illustration  (Figure 
III)  shows  one  of  these  pockets  in  use.  He  enters  his 
name,  or,  if  he  cannot  write,  his  check  number,  runs 
a  line  through  the  operation  to  be  performed  and  when 
through  with  it  makes  another  cross  on  the  dial.  The 
plan  described,  as  will  be  seen,  also  serves  as  a  check 


134 


COST  OF  PRODUCTION 


on  the  workman  for  the  machine  number  and  the  name 
of  the  operation  or  department  must  correspond.  For 
instance,  if  a  shaper  was  numbered  26,  and  the  work- 
man crossed  out  the  operation  of  sawing  on  the  card 
bearing  the  shaper  number,  the  time  clerk  would  im- 
mediately know  that  there  had  been  an  error  made  and 
could  trace  it.    Of  course,  workmen  would  be  paid  for 


ORDER  t>0. 

SHOP  ORDER  NO. 

MACHINE     NO. 

S3 

Uaf  .70,  0? 

^ 

jL~~~+« 

CHECK  NO. 

6<r 

OPERATIONS 

SANWNO 

/*— 7^ 

12 

Y^/    WH,CM  SLm  ijm     \ 

■ — r*4* 

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00 wnjJMj  X 

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MAXIMA 

REMARKS 

PUTTING  ON  RIM! 

MOULDING 

t~~y    nature  or     Vs-J  .             > 

°"t        I  ON  WHAT         *'*/o/     7/ 

CARVINGS 

BARS 

^ 

COMPUTING 

k         \/   ?v                                 > 

NO   HOURS 

J/J                                    /J" 

^s//  /,'  1  \\  \Jyr 

TOTAL  COST 

COST  EACH 

,oor>/s 

Fig.  n 

the  time  indicated  on  the  card.  The  different  cards 
they  turn  in  each  day  show  the  exact  amount  of  time 
worked,  and  the  exact  cost  of  the  labor  can  thus  be 
obtained. 

It  is  a  very  simple  matter  to  determine  the  cost  of 
non-productive  labor  by  computing  the  cost  of  the  pro- 
ductive labor  for  a  given  period  in  a  given  department, 


COST  OF  WOOD  WORKING  135 

and  dividing  the  amount  thus  obtained  into  the  cost  of 
non-productive  labor  for  the  same  length  of  time  in  the 
same  department.  To  illustrate:  Assuming  that  the 
productive  labor  amounted  to  $1,000.00  for  a  given 
period  of  time,  and  the  non-productive  labor  for  the 
same  department  amounted  to  $100.00.  By  dividing  as 
stated  above,  the  result  would  be  10  per  cent.  There- 
fore to  the  cost  of  the  productive  labor  add  10  per  cent 
to  cover  the  cost  of  the  non-productive  labor. 

There  should  be  turned  in  each  day  by  the  foreman 
of  the  machine  room  the  exact  amount  of  rough  lumber 
cut.  This  should  include  all  scrap  and  waste  for  each 
order  number. 

In  keeping  a  stock  record  a  card  should  be  made 
out  for  each  kind  of  lumber,  the  cards  to  be  filed  be- 
tween suitable  guide  cards  (Figure  IV). 
Reconf  W^hen  lumber  is  received  it  is  entered  on 

the  card  in  the  proper  column,  noting  the 
date,  from  whom  received  and  the  amount.  The  daily 
reports  turned  in  by  the  foreman  of  the  cutting  room 
should  show  the  amount  of  stock  cut  for  each  order, 
and  from  his  reports  the  amount  of  stock  could  be  en- 
tered. When  an  order  is  made  out  in  the  office  the 
actual  net  amount  of  lumber  needed  for  its  construc- 
tion is  determined  and  entered  in  the  proper  column. 
Thus  the  amount  of  scrap  and  waste  can  easily  be  de- 
termined by  a  comparison  of  the  foreman's  report  and 
the  office  estimate. 

In  determining  the  percentage  of  waste,  add  the 
various  amounts  of  stock  estimated  for  the  different 


136 


COST  OF  PRODUCTION 


orders  and  also  the  amount  of  stock  cut,  and  the  differ- 
ence will  give  the  amount  of  scrap  and  waste  together. 
The  superintendent  should  estimate  the  amount  of 
stock  in  the  scrap  bin.  The  difference  between  the 
stock  there  and  the  total  amount  of  scrap  and  waste, 


Fig.  HI 


divided  by  the  amount  of  stock  cut,  will  give  the  pro- 
portion of  waste. 

Several  entries  on  the  card  (Figure  IV)  serve  to 
properly  illustrate  this.  It  will  be  seen  that  the  entries 
show  that  on  the  orders  No.  250,  No.  251  and  No.  252,  the 
office  estimate  amounted  in  the  aggregate  to  3,223  feet. 
The  actual  amount  of  material  cut  was  4,353  feet.  The 
superintendent  finds  the  amount  of  scrap  to  be  354  feet. 


COST  OF  WOOD  WORKING 


137 


The  difference  between  the  amount  actually  cut  and  the 
office  estimate  is  1,028  feet ;  deducting  the  345  feet  of 
scrap. 

This  result  determines  the  cost  of  material,  and  the 
15  per  cent  thus  obtained  is  added  to  the  estimate  to 
cover  the  cost  of  waste,  and  this  will  give  approxi- 
mately an  accurate  cost  of  material. 


KINO  OF  LUMBEft 

^^^ECE.vrt     ^       y                    j] 

us 

ro 

OATE 

FROM    WHOM| 

RECEIVED 

DATEI 

OROtR   NO 

rflfift, 

AMI     CUT 

•  MTSCRAP 

WASTE 

BaiaxcE 

7 

'6 

a.As& 

/ 

n 

-  J<rs 

/Jco 

/TfC 

7 

/.< 

tfrc  e 

r{ 

/  *S~o  o 

t 

ff 

7-7  0    O 

/ 

FIG.  IV 


It  is  next  necessary  to  ascertain  the  cost  of  the 
complete  article.    To  do  this  an  assembly  card  (Figure 
V)  is  suggested.    The  cost  of  the  different 
Complete  operations   by    departments,   as   will   be 

seen,  is  entered  in  the  proper  column,  the 
operator's  name  or  number  and  the  department,  the 
number  of  hours  employed  and  the  total.     Material 


138 


COST  OF  PRODUCTION 


can  also  be  figured  with  the  value  and  the  cost  per 
piece  for  material,  cost  per  piece  for  labor,  the  shop 
burden  or  loss,  or  according  to  the  name  of  the  article. 
The  cards  may  be  filed  in  one  of  three  ways,  either 
alphabetically,  according  to  the  name  of  the  party  for 
whom  the  order  was  constructed,  numerically,  accord- 
ing to  the  order  number,  or  according  to  the  name  of 


no.  ntcct 

NAME  OF  ARTIOU 

SHOP  ORDER  lib". 

DATE  ORDERED 

0X, 

DATE    BEGUM 

DATE       FINISHED 

OEPARTMEM 

^OPERATIONS 

HOURS 

RATE 

AMOUNT 

MATERIAL 

AMOUNT 

(J/^I^s 

^;r 

/C 

i-y 

/ 

Ya 

/-rd~o'    '/tfisiAi 

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■fo 

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'4 

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ft 

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a 

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ft  A 

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TOTAL  COST      MATERIAL 

// 

(J 

SHOP.   BURDEN 

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+y 

COST  PER  PIECE   MATERIAL 

'it 

.                                   LABOR 

% 

TOTAI  l«6QR  COST  OK  7 

torv% 

/4 

sl 

TOTAL  COST  PER  PIECE 

r*t 

T~~ 

Fig.  V 


the  article.  The  forms  can  easily  be  enlarged  or  con- 
tracted to  meet  the  particular  requirements  of  factories 
of  any  capacity,  and  it  will  apply  to  any  line  in  the 
manufacturing  world. 

This  system  was  originally  devised  for  a  large 
wood-working  factory  in  Eastern  Pennsylvania,  where 
it  was  given  a  thorough  trial  of  five  months,  beginning 
from  the  very  day  it  was  installed. 


COST  OF  WOOD  WORKING  139 

The  real  merit  in  the  system  lies  in  the  fact  that 
while  it  was  devised  for  a  wood-working  factory,  it  has 
been  adapted  to  many  large  factories  in  other  lines  and 
there  is  not  a  single  instance  where  its  simplicity  and 
accurateness  has  not  been  commented  on  favorably. 


CHAPTER    XVII 

ASCERTAINING  THE  COST  OF  PRODUCTION 
BY  E.  J.   HATHAWAY 

Every  manufacturing  establishment  should  have  a 
system  for  ascertaining  the  actual  costs  of  production. 
There  are  many  systems  in  use,  but  perhaps  none  that 
is  applicable  in  its  entirety  to  all  lines  of  business. 
There  are,  however,  certain  general  features  that  govern 
all  such  systems  and  which  may  be  adapted  to  any  line 
of  manufacture  with  but  little  variation. 

The  chief  desideratum  in  a  factory  cost  system  is 
simplicity.  It  should  be  easily  understood,  economical 
in  operation,  and  its  importance  to  the  business  should 
be  recognized  by  every  employe'.  The  difficulty  with 
most  factory  systems  is  that  they  are  too  complicated. 
They  attempt  to  give  too  much — much  that  is  unneces- 
sary— and  they  are  too  expensive  in  the  handling. 

The  following  system  of  ascertaining  the  cost  of 
work  is  used  in  one  of  the  largest  printing  and  book- 
binding houses  in  Canada.  It  is  the  natural  develop- 
ment of  many  years  of  experience  with  cost  systems, 
and  is  a  simple,  economical  and  accurate  record  of  all 
work  passing  through  the  factory. 

A  work  docket,  giving  the  general  particulars,  de- 
scription of  work,  record  of  paper  to  be  supplied,  time 
promised  and  other  such  information,  is  written  in 

140 


E.  J.  HATHAWAY 


141 


duplicate,  the  original  (Figure  I)  going  into  the  factory 
with  the  work,  and  the  duplicate  (Figure  II)  remaining 
on  a  loose-leaf  file  in  the  office. 

Every  producing  employe"  in  the  factory  is  required 
to  hand  in  a  work  ticket  (Figures  III,  IV,  and  V)  each 


[*J*5*|        ""TSE^**    "0J     1255 
w.„TCo  f^^jtottc.     &*&■».-. =.. 

IV                                         ,  ,        i  i                       ii 

MMMM 

CM.ROCO.^r.gJ..-.         ,„jl._. .mount.  ±k&:<» 

STOCK  SUPPLIED  WITH  DOCKET  • 

Bj.e.0,jfe.i. ^JRi^^f^.. ......  w*p. 

s          c 

TOTALS 

...c. 

'■ol 

i.i. 

9 

7V 

.... covins ....                                   ,...  PEA  ...  •  .... 

RAINTINO 
COtT 

COMPOSITION  r«0«l  WOAK  TICKETS  ... 

PKESSWOAK  rnoM  WOAK  TICKETS  ...... 

COST  or  INK.  ............... . 

9.1. 
XL 

/2 

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mm 

COST 

LAOOA  FROM  «0»«  TICRCTS    ._.._.._... 

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WORK 

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CNTCRtO  IN  RC 

Mm  mat  „2t£H-            ..._fctta.y*fc&L  '«o  3 

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Fig.  I 


evening,  showing  a  record  of  his  work  during  the  day, 
giving  the  docket  numbers  of  the  one  or  more  jobs  on 
which  he  has  been  engaged,  the  nature  of  the  work  and 


142 


COST  OF  PRODUCTION 


the  time  actually  employed  on  each.  The  records  from 
these  tickets  are  posted  in  the  office  each  day  to  the 
duplicate  docket  according  to  the  several  branches  of 
the  work,  each  item  being  checked  off  as  it  is  entered, 


"                   1      \                            •                          i,i 

description: 

!,<XK>  koofe&G.  fcY<J,    16pp. 
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..-charced  . — ......    me               a...........   amount*. ............... 

STOCK  SUPPLIED  WITH  DOCKET. 

J...  s—Lo. s.  steJDffj  jjMacqpts  s»^|A 

».-lO..«..i?.....«BR^i*it,^-L...tf« 

*               C. 

TOTALS. 

.... 

...» ____.COVIHS HH  T-»,.,. 

COST  OF  LABOR  FROM  WORK  TICKETS 

COMPOSITION 

PRESSWORK 

BINOINO 



Fig.  II 


the  workman's  number  appearing  above  and  the  value 
of  the  time  charged  below.  (Thus  in  Figure  III  the 
first  entry   under  composition,   42/60,  indicates  that 


E.  J.  HATHAWAY 


143 


compositor  No.  42  has  worked  on  docket  J  1255,  to  the 
value  of  sixty  cents.) 

As  this  file  of  duplicate  dockets  contains  only  those 


COMPOSING  ROOM  DAILY  WORKTICKE1 

cncci  no.  . jjif.  ......... 

"-O..T,                       ...^^i*?tr.£t ««3....„ 

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OVERTIME 



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Fig.  in 


of  work  actually  in  hand,  it  may  be  handily  referred  to 
at  any  time  for  information  as  to  work  in  progress  with- 
out the  necessity  of  searching  through  a  number  of  de- 


144 


COST  OF  PKODUCTION 


partments,  and  a  little  familiarity  with  employe's'  num- 
bers will  enable  one  to  know  at  any  time  almost  the  ex- 
act condition  of  the  work  on  any  particular  job. 


P 

ST 

RESS  ROOM  DAILY  WORK  TICKET 

«»»-,.    toumufC. M  *  . 

— r  „Q.?J«a«:-."^>M*^VV- 

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.... 



.... 

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Fig.  IV 


When  the  work  on  a  job  is  completed  in  any  depart- 
ment, the  docket  is  passed  on  with  the  work  to  the  next 
branch,  the  foreman  first  entering  in  the  proper  column 


E.  J.  HATHAWAY 


145 


the  value  of  the  ink  or  other  materials  that  may  have 
been  supplied  from  his  stock,  and  when  the  job  has 


-.  JM1 t)*HfllHfa& ™  3 

BINDERY  WORK  TICKET 

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MM 

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PIG.  V 


finally  been  delivered  to  the  shipping  room,  the  docket 
passes  into  the  office,  where  the  amount  of  labor  is 
10 


146  COST  OF  PRODUCTION 

made  up  on  the  duplicate,  transferred  to  the  original, 
and  the  actual  cost  of  the  job  ascertained.  (Figure 
VI.) 

To  the  prime  cost,  covering  materials  and  direct 
labor,  must  now  be  added  the  percentage  covering  man- 
agement, maintenance,  and  other  working  expenses,  in 
order  to  find  the  net  cost  of  the  work.  The  docket  as 
now  completed  is  sent  to  the  invoicing  clerk,  to  be 
marked  with  the  date  of  charge  and  amount,  for  pur- 
poses of  reference,  and  then  filed  in  an  alphabetical 
index.  The  duplicate  (Figure  VII)  is  filed  in  a  corre- 
sponding numerical  index,  and  thus  ready  reference 
may  be  made  to  any  particular  job  by  name,  number  or 
date  at  any  time. 

This  docket  system  has  now  been  in  use  for  a  con- 
siderable time,  and  has  in  every  way  proven  highly 
A  System  That  satisfactory.  Its  advantages  over  the 
Va\uebyVActual  crU(ie  and  immature  systems  in  general 
Trial  use  are  manifold.      Its  operation  is  re- 

moved from  the  hands  of  the  departmental  foremen,  who 
are  liable  to  error  in  the  handling  of  accounts,  and 
costs  of  labor  are  made  up  by  an  independent  clerk. 

It  is  a  ready  check  on  all  estimates,  as  it  contains 
the  cost  of  paper,  labor  by  departments  and  materials, 
the  elements  entering  into  all  properly  prepared  esti- 
mates. The  dockets  giving  actual  results  are  always 
accessible,  in  cases  of  request,  for  new  estimates  or 
repeat  orders.  Errors  on  the  part  of  employe's  in 
making  out  their  work  tickets  can  easily  be  traced,  and 


E.  J.  HATHAWAY 


147 


excessive  costs  of  labor  in  any  department  can  readily 
be  located  and  accounted  for. 

The  file,  with  its  "live"  dockets,  is  a  daily  record 
of  the  work  in  hand  and  its  present  condition.    It  pro- 


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STOCK  SUPPUCO  WITH  OOCKCT  . 

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COST  or  INK  .  ........... ....... 

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1                                             rORCMAN  PBtriTERY                                                                       fORCMAN  BINOCRV 

CNTCHCO  IN  net 

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,r  ■  l  »- 

CLERK  OT  FACTORY 

Fig.  VI 


vides  an  easy  means  of. finding  jods  that  have  oeen  un- 
duly delayed  and  of  answering  the  varied  inquiries  for 
work  which  is  in  progress. 


148 


COST  OF  PKODUCTION 


The  above  system  of  recording  factory  costs  of  pro- 
duction has  proved  of  inestimable  value  to  the  printing 
and  binding  house  in  which  it  is  being  used.  It  is  in- 
clusive in  its  scope,  yet  it  is  so  simple  in  its  operation 


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COST  OF  LABOR  FROM  WORK  TICKETS 


..fyk.*jut&.*+$ifiiA.-- 1 I — -T.. 1  °i 


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iz- 


fig.  vn 


that  it  is  readily  understood,  and  it  requires  little  time 
on  the  part  of  employe's  for  filling  in  the  required  data. 
To  the  line  of  work  to  which  it  is  applied  it  seems  to 


E.  J.  HATHAWAY  149 

have  overcome  many  of  the  difficulties  which  seem  to 
affect  the  various  methods  of  securing  accurate  records 
of  costs  of  production.  It  is  inexpensive  both  in  its  in- 
stallment and  in  its  operation,  and  has  proven  its 
effectiveness  in  actual  trial — a  trial  that  has  been  as 
severe  as  it  has  been  satisfactory  in  its  results. 


CHAPTER  XVIII 
HOW  FACTORY  COSTS  ARE  FOUND 

BY  NORTON  W.  CHARLES 

The  competitive  spirit  of  the  business  world  of  to- 
day has  permeated  through  the  outer  strata  of  com- 
mercial organization  and  is  now  at  the  very  root  of 


i 


AM)     fO^AO-A 


SG2-& 


ARE  HERESY  AUTHORIZED  TO  DO  THE  FOLLOWING  WORK.  VIZ. 


£-        tiO      T^UejOAA^JAA  .    TO.  L.} 


REQUISITION  CHANTED  TOR  THE  FOLLOWING  STOCK.  VIZ. 


14.    QJbo.^,W*-C. 


T\OQ*AA 


oaV  «&**  W&tT^ 


<vuJtS"9>.  ib«AUcAA 


'hf* 


*  muPT. 


Fig.  I;   the  foreman's  order  from  the  superintendent 

enterprise  and  industry — namely,  the  factory  and  the 
workshop.  No  matter  how  large  or  how  small  the  out- 
put, how  great  or  how  little  the  investment  of  capital, 
how  sagacious  or  how  limited  the  executive  ability  of 
the  concern,  there  is  demanded  alike  of  all  the  final  re- 
sult of  definite  competitive  quotation  on  standard  prod- 

150 


NORTON    W.    CHARLES 


151 


ucts.  The  minor  manufacturer,  limited  by  capital,  lack 
of  organization  or  concentration  of  interests,  or  even  by 
inexperience  and  neglect  of  system — in  fact,  not  even  so 
established  that  he  may  work  together  into  an  har- 
monious whole  the  different  ends  of  his  business,  is  con- 
fronted constantly  by  the  problem  of  placing  his  goods 
upon  the  market  at  the  same  figure  and  under  the  same 
trade   inducements   as   his   stronger   and   thoroughly 


tfMMM 

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UNIT 

ITIN 

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MI«CCLLANC«US 

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Fig.  VI;  the  shop  expense  record 

equipped  competitor.  Time  is  too  precious  in  which  to 
experiment,  the  balance  of  power  is  all  on  the  one  side, 
and  it  becomes  apparent  at  once  that  to  apply  the  pro- 
ducing prices  of  the  larger  enterprise  to  the  smaller 
forms  a  peculiar  misfit.  Therefore,  a  mechanical  process 
by  which  the  details  of  manufacture  may  be  statisti- 
cally arranged  and  compared  becomes  of  inestimable 
value,  and  the  only  true  and  safe  course  for  determin- 
ing the  cost  of  production. 


152  COST  OF  PRODUCTION 

Nothing  appears  to  yield  a  better  result  than  the 
versatile  card  systems.  Added  to  this  must  be  sys- 
How  a  Factory  tematic  arrangement  of  factory  equip- 
A^a^Sl  ment> the  intelligen<*  of  an  able  cost-figur- 
Cost  System  jng  department,  and,  above  all,  persever- 
ance in  accomplishing  the  results  sought.  To  illustrate 
the  first  point,  let  us  diagram  the  factory  arrangement 
and  we  find  the  following  necessary  departments  and 
duties  therein : 

I.  Shop  Order  Department — (a)  Analyzes  orders, 
(b)  Makes  foreman's  orders. 

II.  Factory  Clerks — (a)  Time  charging,  (b) 
Stock  charging. 

III.  Stock  Department — (a)  Orders  stock,  (b) 
Raw  stockrooms,     (c)  Store  stockrooms. 

IV.  Shop  Expense  Department — Figures  and  al- 
lots shop  expense. 

V.  Piecework  Rate  Department — Figures  piece- 
work rates. 

VI.  Shop  Schedule  Department — (a)  Schedules 
orders,  (b)  Sees  that  above  are  carried  out  by  follow- 
up  system. 

VII.  Counting  or  Transfer  Room — In  other  words, 
the  factory  "clearing  house." 

VIII.  Shop  Ticket  Department — (a)  Assembles 
tickets,    (b)  Inspects  tickets. 

IX.  Cost  Figuring  Department — Final  Summary 
of  Costs. 

Of  these  nine  divisions,  it  will  be  seen  that  com- 


NORTON   W.    CHARLES 


153 


154 


COST  OF  PRODUCTION 


binations  may  be  made  to  reduce  the  organization  into 
more  general  heads,  but  not  to  destroy  their  individual 
functions.  But  considering  the  above  to  exist  as  stated, 
let  us  take  up  an  order  in  progress  through  the  factory 
and  see  how  the  system  may  be  applied.  When  the 
order  comes  into  the  factory,  after  receiving  a  house 


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Pigs.  VII  and  V;  the  follow-up  card  and  piece-work  record 


number,  it  is  delivered  to  the  shop  order  department, 
the  order  is  then  analyzed  by  the  superintendent  and 
each  foreman's  work  is  outlined  in  Figure  I  (in  this 
case  for  the  completion  of  copper-lined  reservoirs  in  a 
stove  factory),  together  with  a  requisition  upon  the 
stockroom  for  the  stock  necessary  in  construction.    Ad- 


NORTON   W.    CHARLES 


155 


dition  to  such,  if  required,  may  be  made  only  by  the 
superintendent.  Each  foreman  files  these  cards  in 
order  of  completion,  or  may  file  ahead  in  case  of  rush 
orders.  Every  employe"  is  provided  with  a  time  card 
(Figure  II).  These  are  filed  in  an  open  tray,  under 
alphabetical  guides  (if  collected),  or  upon  board,  with 
hooks  convenient  to  section  where  used.  Upon  com- 
mencing the  job,  the  workman  indicates  by  cross  at  the 
proper  hour  and  minute,  as  shown  in  the  cut,  and  upon 


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Fig.  IX;  where  the  shop  tickets  are  checked 

completion  makes  similar  indication  in  the  opposite 
square.  Such  time  is  then  estimated  and  entered  above 
by  the  timekeeper  and  indicated  in  his  book  as  a  check 
(together  with  all  postponements  on  the  job)  ;  the  ticket 
accompanies  the  article  as  completed.  From  such  a 
system,  piece-work  rates  may  readily  be  computed,  and 
the  encouragement  of  industry  among  workmen  is 
evident. 


156 


COST  OF  PRODUCTION 


When  the  truckman  is  sent  to  the  storeroom  for 
his  necessary  stock,  he  takes  his  requisition  card  as 
evidence.    Upon  Figure  III  the  different  articles,  their 


$*4 


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10   r  tn 


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rnomoin  CW  S.      to  our   ^-H. 


Fig.  VIII;  how  defective  work  is  noted 


location  and  other  information  are  entered,  and  the 
clerk  in  charge,  upon  giving  out  any  amount  on  a  given 
requisition,  enters  it  upon  this  card  and  credits  back 
any  amount  of  the  material  returned,  thus  keeping  a 


NORTON    W.    CHARLES  157 

record  of  his  stores,  adding  to  such  balance  when  re- 
plenishments come  in.  These  acquisitions  and  the  neces- 
sary indications  to  warrant  them  are  entered  on  Figure 
IV,  and  by  such  arrangement  the  supply  always  exceeds 
the  demand. 

For  the  purpose  of  estimating  the  cost  on  this  ar- 
ticle to  be  manufactured,  a  knowledge  of  the  machine 
How  the  Shop  capacity  is  necessary,  otherwise  no  piece 
Materialists  ra^e  c°uld  be  established,  nor  non-produc- 
Are  Found  ^ve  iabor  (such  as  clerical  hire)  esti- 
mated. The  shop  expense  department  figures  this 
capacity  in  reference  to  this  single  job  (Figure  V),  and 
upon  results,  as  previously  summarized,  the  rates  for 
piece  work,  as  determined  under  the  different  opera- 
tions, is  entered  on  Figure  VI.  (It  should  be  borne  in 
mind  that  rent,  interest  and  depreciation,  non-produc- 
tive labor,  heat  and  light  and  taxes  are  all  items  of  ma- 
chine expense,  and  enter  pro  rata  into  the  cost  price  of 
the  manufactured  product).  These  cards  were  kept  in 
file  under  indexes  to  articles. 

In  order  to  insure  the  rapid  progress  of  the  order 
through  the  factory,  the  shop  schedule  department  is 
supplied  by  the  superintendent's  office  with  Figure  VII, 
upon  which  the  different  component  parts  are  listed, 
together  with  the  departments  in  which  they  are  being 
constructed,  and  the  time  for  their  necessary  transfer 
from  said  department.  By  the  use  of  this  card,  filed 
under  daily  guides,  this  department  can  use  a  follow-up 
system  and  investigate  delayed  work  under  any  fore- 


158 


COST  OF  PRODUCTION 


man.  When  the  job  is  completed,  the  foreman  sends 
them,  with  his  cards  and  orders  relative  thereto,  to  the 
transfer  room.  Figure  VIII  is  filled  out  roughly  in  pen- 


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Fig.  XII;  the  costs  of  manufacture  record 


cil  by  the  receiving  clerk  and  the  duplicate  torn  off 
(manifold  carbon  copy  may  be  used)  and  handed  him  as 
evidence  of  the  satisfactory  completion  of  his  work  and 
a  release  from  further  responsibility.     Any  defective 


NORTON    W.    CHARLES 


159 


work  is  deducted  and  returned;  the  original  is  for- 
warded with  the  job. 

The  shop  tickets  department  now  collects  the  dif- 


r 


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i 


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4. 


I 


ferent  tickets,  checks  them  (after  inspection  of  the  job), 
and  then  stamps  them  aO.  K.,"  or  sends  them,  clipped 
together  with  Figure  IX,  printed  on  ordinary  paper,  to 


160  COST  OF  PRODUCTION 

the  cost  figuring  department.  Here  the  final  summary 
is  made  on  Figure  X.  Four  items  have  entered  into  the 
cost  of  each  article  of  the  assembled  whole,  to- wit: 
Labor,  shop  expense,  material  and  material  expense, 
the  last  being  the  cost  of  placing  any  item  of  finished 
stock  in  condition  for  use  in  the  particular  article,  for 
parts  are  continually  being  constructed  and  stored  for 
use  in  the  assembled  whole.  The  total  cost  upon  this 
particular  job  is  entered  upon  Figure  XI,  with  entire 
specifications  for  general  reference  upon  Figure  XII. 
Comparisons  in  the  relative  cost  of  production  of  the 
complete  article  (as  on  Grade  A  Range)  are  made  by 
successive  outputs  on  Figure  XIII.  This  last  card 
forms  a  separate  file  for  general  reference,  and  is  filed 
under  index  to  articles ;  the  rest  are  filed  together  under 
the  main  order  number. 

The  successful  operation  of  such  a  system  therefore 
enables  the  manufacturer  not  only  to  formulate  accurate 
and  safe  quotations  in  special  output,  but  to  establish  a 
listed  cost  price  of  every  product  and  integral  part 
thereof.  The  comparisons  on  the  last  form  show  at  a 
glance  the  rise  and  fall  in  the  producing  cost  of  each 
order,  and  by  tracing  back  the  statistics  relative  to  this 
order,  the  cause  may  be  located  and  the  defects  of  the 
factory,  whether  in  employment,  machine  output,  or 
purchase  of  stock  supplies,  may  be  remedied.  Such  re- 
sults most  certainly  repay  the  cost  of  maintaining  the 
system  and  justify  every  effort  expended  in  its  behalf. 


CHAPTER    XIX 

THE  COST  OF  PRODUCTION 

BY  CHARLES  J.  WATTS 

To  devise  a  simple,  effective  and  economical  system 
for  securing  accurate  factory  costs  is  a  problem  many 
manufacturers  have  yet  to  solve.  In  these  days  of  fierce 
competition,  the  average  maker  of  a  standard  line  of 
goods  is  tempted  to  use  the  selling  prices  of  his  com- 
petitors as  a  guide  in  determining  his  own. 

But  he  can  not  be  certain  that  the  result  obtained 
by  this  means  will  insure  a  profit  under  the  conditions 
peculiar  to  his  factory.  He  is  at  all  times  confronted 
with  the  idea  that  his  competitors  may  be  more  progres- 
sive and  that  the  systems  employed  by  them  may  facili- 
tate the  operations  in  their  factories  and  thus  reduce 
the  cost  of  production.  With  this  uncertainty  of  his 
competitors'  methods  and  systems  he  can  not  with 
safety  base  his  cost  simply  on  their  selling  prices. 

Again,  the  manufacturer  who  operates  his  factory 
on  the  basis  of  the  cost  of  material  and  of  flat  labor, 
adding  a  percentage  to  cover  non-productive  labor, 
manufacturing  expense  and  general  expense,  as  well  as 
contemplated  profits,  is  no  nearer  solution  of  the  prob- 
lem of  factory  costs  than  the  one  relying  simply  on  the 
prices  charged  for  similar  goods  by  other  concerns. 
11  161 


162  COST  OF  PRODUCTION 

In  this  chapter  is  presented  a  cost  system,  which, 
while  free  from  all  the  intricate  problems  of  a  balance- 
ledger  system,  furnishes  information  sufficiently  accu- 
rate for  all  practical  purposes.  It  will  also  enable  the 
progressive  manufacturer  to  determine  his  own  costs 
absolutely,  as  well  as  to  point  out  to  his  superintendent 
any  weakness  existing  in  the  operation  of  the  factory 
and  so  provide  for  a  speedy  reduction  of  excessive  ex- 
pense in  the  cost  of  manufacture. 

This  system  is  a  clear  and  concise  statement  of 
what  the  factory  is  consuming  in  labor  and  in  material, 
as  well  as  of  its  operating  expenses.  No  profits  are  in- 
cluded. 

As  there  are  but  five  main  accounts  to  be  con- 
sidered, it  is  more  simple,  but  at  the  same  time  as  com- 
plete and  as  effective  as  many  which  are  more  elaborate 
and  complicated. 

The  terms  and  illustrations  used  in  describing  and 
explaining  the  workings  of  this  system  are  taken  from 
the  author's  experience  in  the  manufacture  of  agricul- 
tural implements.  They  are  simply  illustrative.  To 
apply  the  principles  to  the  conditions  existing  in  any 
factory  it  is  only  necessary  to  substitute  for  those 
used  in  this  book,  the  terms  and  units  of  your  own 
product. 

The  principal  items  which  contribute  to  the  costs 
in  a  factory,  are  material,  labor,  manufacturing  sup- 
plies, special  items  of  cost  and  general  expense. 

Material  is  the  basis  of  manufacture  and  in  a  sys- 


CHARLES   J.   WATTS  163 

tern  of  factory  costs  it  should  be  first  considered. 
The  illustration  (Figure  I)  represents 
Material  the  cutting  list  or  detail  of  one  part ;  i.  e., 

a  shaft  of  a  hay  rake.  In  the  same  man- 
ner this  detail  arrangement  may  be  applied  to  any 
standard  line  of  goods  manufactured  in  quantities,  or 
to  goods  made  up  in  advance  of  specific  orders  or  sales. 

The  different  kinds  of  materials  used  are  specified 
under  sub-headings,  so  as  to  permit  of  a  summary  being 
readily  made  of  the  totals  required  of  any  particular 
kind  or  class  of  material. 

On  the  guide  space  of  the  front  of  the  card  is  the 
part  number  and  the  name  of  the  given  part.  Under 
this  guide  space  is  the  name  of  the  machine  to  which 
the  part  belongs.  Under  "Size  and  Dimensions"  are  the 
width,  the  thickness  and  the  length  of  the  wood  used  in 
this  part.  Next  to  this  is  the  quantity  in  feet,  hun- 
dredths of  a  foot,  and  in  the  several  columns  to  the 
right  are  the  numbers  of  pieces  of  this  kind  used  on 
this  implement.  Following  this  is  the  column  showing 
the  kind  of  material  used. 

Below  are  spaces  for  three  changes  should  the 
thickness,  length,  kind  of  stock,  or  other  detail  be 
changed. 

The  finish  of  the  part  or  anything  special  is  noted 
under  "Remarks." 

On  the  reverse  side  of  the  card  is  provided  a  space 
for  recording  the  cost  of  labor,  which  will  be  referred 
to  later  on. 


164 


COST  OF  PRODUCTION 


In  describing  the  system,  an  8  x  20  tooth  rake  will 
be  used  as  an  example.  Other  sizes  would  of  course  be 
computed  on  the  same  basis. 

To  arrive  at  the  cost  of  material  in  this  machine, 
complete,  a  material  summary  card,  (Figure  II)  is 
used,  which  gives  the  totals  in  feet,  pounds  or  count  of 
the  different  kinds  of  material  used,  made  up  from 
separate  detail  cards  (Figure  I). 


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Fig.  I  (obverse) 


In  a  rake  of  this  kind  the  materials  used  are 
lumber,  cast  iron,  malleable  iron,  common  bar  steel, 
spring  steel,  rake  tooth  stock,  etc.,  as  well  as  bolts,  nuts, 
washers,  hinge  pins,  cotters  and  other  small  stock. 

In  making  up  this  detail  (Figure  I)  there  should 
be  a  card  for  each  part,  bolt,  nut,  washer,  etc.,  so  that 
there  will  be  a  complete  list  of  all  the  materials  in  the 
implement.    In  case  any  parts  are  bought  outside  of  the 


CHARLES    J.    WATTS 


165 


factory,  the  detail  cards  (Figure  I)  can  be  ruled  on  the 
back  to  provide  a  space  for  keeping  a  record  of  the 
contract  price  in  place  of  the  labor  ruling  as  shown,  or 
the  same  labor  ruling  could  be  used,  substituting  the 
price  in  place  of  labor  operations. 

A  total  summary  (Figure  III)  of  material  and 
labor,  shows  the  complete  cost  of  100  machines.  To 
arrive  at  this  result  the  totals  of  the  different  materials, 


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as  shown  by  the  material  summary  cards  (Figure  II) 
are  taken,  for  example,  first  the  item  of  lumber,  $55.80, 
was  obtained  from  the  card  shown  in  Figure  II.  The 
other  items  in  the  summary  were  obtained  in  a  similar 
manner. 

While  the  cost  of  labor  is  also  shown  in  this  sum- 
mary, the  method  of  computing  it  will  be  explained 
further  on. 


166 


COST  OF  PRODUCTION 


These  summaries  are  to  be  made  up  whenever  a 
revised  cost  is  wanted,  as  the  cost  of  manufacture  may 
increase  or  decrease  with  changing  conditions  of  the 
labor  or  of  the  material  market. 

In  computing  costs  according  to  this  system  only 
the  actual  amounts  of  material  necessary  to  make  the 
part  have  been  considered  and  there  must,  of  course,  be 
an  allowance  for  waste. 


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This  the  foreman  of  the  wood  shop  can  estimate 
so  that  an  accurate  percentage  can  be  added  to  the  cost 
of  the  lumber.  In  this  line  of  goods,  the  waste  will 
average  20  per  cent,  while  with  castings,  steel  parts, 
bolts,  nuts,  washers,  etc.,  3  to  5  per  cent  will  cover  any 
ordinary  waste. 

As  every  progressive  manufacturer  contracts  for 
material  on  the  basis  of  a  season's  supply,  it  is  not 


CHARLES    J.    WATTS 


1G7 


difficult  to  determine  the  cost  of  the  different  raw  ma- 
terials. 

It  is  recommended  that  the  detail  cards  (Figure  I) 
be  made  up  on  the  detail  side  in  the  office  and  that  the 
labor  items  be  recorded  on  the  cards  by  the  clerks  in  the 
several  departments  through  which  the  pieces  pass  in 
course  of  manufacture.  They  are  then  to  be  delivered  to 
the  cost  department,  where  the  cards  (Figures  II  and 


JJitfd  Jrcvjru,  fjtZO 


Fig.  Ill 


III)  are  compiled,  after  which  all  cards  are  kept  in  a 
cabinet  in  the  cost  department. 

If  any  changes  occur  affecting  the  kind,  cost  or 
quantity  of  material,  the  clerk  having  charge  of  such 
details  may  either  make  the  changes  from  time  to  time 
as  they  occur,  or  preferably  by  means  of  a  notification 
slip  advise  the  cost  clerk  of  these  changes.  The  latter 
can  then  record  the  changes  at  his  leisure.    This  sys- 


168 


COST  OF  PRODUCTION 


tern  permits  of  a  perpetual  cost  account  being  kept, 
since  there  is  provision  in  both  cards  (Figures  I  and 
II)  for  recording  such  changes. 

As  many  manufacturing  plants  make  their  own 
cast  iron,  they  no  doubt  have  a  foundry  statement  show- 
ing the  cost  of  melted  iron  from  the  cupola.  But  to 
make  this  simple  system  complete,  we  submit  an  easy 
method  (Figure  IV)  for  obtaining  the  cost  of  melted 


Fig.  IV 


iron.  The  labor  of  the  molders  is  recorded  on  the  back 
of  the  detail  card  (Figure  I)  so  that  the  material  is 
figured  separately  from  it. 

To  obtain  the  cost  of  one  pound  of  melted  iron  from 
the  cupola,  the  total  cost  of  pig  iron,  scrap,  sprues, 
gates  and  coke,  together  with  cupola  labor,  is  divided 
by  the  total  weight  of  the  good  castings  obtained  from 
the  heat.     The  result  will  be  the  cost  per  pound  of 


CHARLES    J.    WATTS  1G9 

melted  iron.  Castings  are  figured  at  the  cost  of  melted 
iron,  and  the  foundry  labor  is  added  afterwards.  This 
gives  the  actual  cost  per  casting.  For  malleable  iron 
the  same  general  rule  applies. 

On  this  card  (Figure  IV)  is  kept  the  heat  record 
of  the  foundry.  These  cards  are  filed  in  a  cabinet  and 
form  an  excellent  comparative  statement.  Although 
different  kinds  of  pig  iron  would  not  be  bought  at  the 
same  price  per  ton,  a  fixed  amount  is  here  used  to 
simplify  the  example.    It  should  be  charged  at  cost. 

Twenty-two  per  cent  is  added  to  the  cupola  labor 
for  the  non-productive  labor,  as  it  represents  the  per 
cent  which  covers  the  cost  of  foreman,  rough  labor,  etc. 
in  the  foundry.    This  is  fully  explained  further  on. 

The  remaining  entries  on  these  cards  not  specifi- 
cally referred  to  are  self-explanatory,  and  will  suggest 
for  entry  other  items  of  information  which  will  prove 
to  be  of  interest  and  value  not  only  to  the  superintend- 
ent but  to  the  manager  as  well. 

Of  equal  importance  with  the  cost  of  the  materials 
used  in  the  process  of  manufacturing  in  determining 
the  total  cost  of  production,  is  labor. 
Labor  Labor,     in     manufacturing,     is     divided 

into  three  classes.  Productive  labor  is 
that  which  produces  something  tangible  and  of  asset 
value.  In  other  words,  it  is  the  labor  that  from  raw  ma- 
terial makes  a  finished  piece  or  part. 

Next  is  departmental  non-productive  labor.  This 
is  that  class  of  labor  in  each  department  which  is  neces- 


170  COST  OF  PRODUCTION 

sary  to  make  the  productive  labor  most  effective  but 
does  not  of  itself  produce  anything.  To  be  more  ex- 
plicit, a  manufacturing  department  is  generally  made 
up  of  a  number  of  men  over  whom  is  a  foreman,  and  if 
the  number  of  men  be  large  there  is  a  clerk  also.  There 
are  also  truckers,  oilers,  and  a  general  class  of  roust- 
abouts who  must  be  maintained  in  the  department  in 
order  that  the  producers  may  work  to  advantage. 

In  the  plant  must  also  be  shipping  and  stock  clerks, 
timekeepers,  engineers  and  others  who  belong  to  no  one 
department  but  who  are  a  positive  necessity  in  order 
that  the  producing  departments  may  operate  effectively. 
The  labor  of  these  is  called  general  non-productive 
labor. 

If  $1.00  be  the  value  of  productive  labor  and  to  it 
be  added  30  per  cent  as  the  value  of  the  departmental 
non-productive  labor,  $1.30  results.  To  this  is  to  be 
added  the  general  non-productive  labor  which  may  be 
assumed  to  be  40  per  cent  of  the  total  productive  which 
will  give  $1.70  as  the  real  cost  of  each  $1.00  of  produc- 
tive labor  in  the  department. 

If  the  percentages  above  referred  to  are  properly 
calculated,  and  to  the  cost  of  all  the  productive  labor 
in  the  factory  is  added  departmental  and  general  non- 
productive percentages,  the  result  is  the  exact  amount 
of  the  pay  roll  for  the  term  or  period  considered. 

In  order  to  properly  handle  the  cost  of  labor  it  is 
recommended  that  piece  prices  be  established  in  all  de- 
partments which  will  not  only  simplify  the  matter  of 


CHARLES    J.    WATTS 


171 


records,  but  will  also  result  in  a  saving  in  the  cost  of 
manufacture,  as  it  is  a  well  known  fact  that  piece 
workers  are  prone  to  produce  more  work  in  a  given  time 
than  day  workers,  the  greater  effort  of  each  one  being 
attended  by  a  consequent  gain  to  him  in  earnings. 

All  well  conducted  factories  are  divided  into  de- 
partments.   Six  departments  will  generally  be  sufficient 


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to  cover  all  of  the  productive  labor.  These  are  usually 
classed  as  follows :  Wood  shop,  foundry,  steel  or  black- 
smithing  department,  machine  shop,  paint  shop  and 
assembly  room. 

Since  piece  prices  can  always  be  closely  approx- 
imated in  each  of  these  manufacturing  departments,  a 
small  card  cabinet  is  provided  in  which  is  kept  a  record 
of  the  piece  prices  paid  for  work  in  each  department. 


172  COST  OF  PRODUCTION 

The  illustration  (Figure  V)  represents  a  convenient 
price  card  for  the  wood  shop.  On  this  card  are  the 
prices  paid  for  the  labor  in  the  wood  shop  in  making 
the  piece  named  on  the  card  which  in  this  case  is  re- 
ferred to  as  CI.  As  six  columns  are  provided  on  this 
card  for  changes  in  cost  prices  it  will  last  a  long  time. 
Since  in  many  manufactured  articles  certain  parts 
are  identical,  not  so  many  cards  will  be  required  as 


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Fig.  VI 

would  at  first  thought  seem  necessary.  For  example, 
in  this  case  part  CI  although  belonging  specifically  to 
one  particular  rake,  is  also  a  part  of  other  rakes  and 
consequently  this  one  card  will  suffice  in  making  up  the 
costs  of  all  rakes  in  which  this  part  is  used. 

The  card  authorizing  these  changes  (Figure  VI) 
is  to  be  made  out  by  the  foreman  of  the  department 
and  sent  to  the  superintendent  for  his  approval.     If 


CHARLES   J.    WATTS  173 

the  superintendent  approves  of  the  change,  the  original 
and  duplicate  cards  are  sent  to  the  cost  clerk  who 
signs  his  name  to  the  original  as  evidence  that  the 
change  has  been  recorded.  The  original  is  then  sent  to 
the  timekeeper  for  his  guidance  in  making  up  the  pay 
roll.  The  duplicate  is  retained  by  the  cost  department 
and  the  change  is  noted  on  the  reverse  side  of  the  detail 
card  (Figure  I  reverse). 

The  original  card  is  returned,  properly  signed  by 
the  timekeeper,  to  the  foreman  of  the  department  by 
whom  the  notification  card  was  issued.  This  now  indi- 
cates to  him  that  the  change  has  been  made  in  the  cost 
department  and  the  wood  shop  price  card  for  the  part 
CI  is  now  corrected  (Figure  V).  These  changes  serve 
to  keep  the  records  accurate  and  show  at  any  time  the 
exact  cost  of  labor  in  each  department.  Changes  of  this 
kind  must,  of  course,  be  attended  to  promptly,  so  that 
each  interested  person  may  be  advised  of  them  on  the 
same  day.  The  figures  in  circles  represent  the  numbers 
of  the  operations. 

In  addition  to  the  piece-price  cabinets  in  the  dif- 
ferent departments  it  is  recommended  that  a  large  cabi- 
net be  kept  in  the  timekeeper's  office  in  which  piece 
prices  may  be  kept  by  the  timekeeper  so  that  the  time 
cards  may  be  checked.  This  constitutes  a  check  on  the 
different  departments  and  insures  the  accuracy  of  the 
pay  roll. 

A  simple  form  of  time  ticket  (Figure  VII)  is  pre- 
sented which,   with  modifications,   may  be  made   to 


174 


COST  OF  PRODUCTION 


answer  for  all  departments.  The  example  given  (Fig- 
ure VII)  is  the  time  card  of  a  man  working  on  the  part 
CI  in  the  workshop. 

These  time  cards  are  intended  to  be  used  by  every 
man  on  the  pay  roll.  The  several  departments  are  num- 
bered. One  to  six  may  be  the  producing  departments 
and  numbers  from  seven  onward  may  be  applied  to  the 
non-productive  departments,  according  to  the  division 
desired. 


TIME  CARD 

cM«c»«o.~/r.C5. 

....... 

iLu-lA^A^QTU, 

^Sj^iA^  3*jl.  yjg&t 

s£ 

ujjtsvjv  <yuA            /oo             TO./. 

.„  X,l        .(w,       ft*r          //.z<r 

Ov 

MORNING 

•  FIEBNOOI 

STOP 

START 

STOP 

6 

10 

20 

X 

40 

50 

6 

10 

20 

30 

40 

.50 

12 

10 

20 

30 

40 

50 

12 

10 

20 

30 

40 

60 

7 

10 

20 

30 

40 

50 

7 

10 

20 

30 

40 

50 

1 

10 

20 

30 

40 

5  = 

1 

10 

20 

30 

40 

SO 

8 

10 

20 

OO 

40 

•50 

3 

10 

20 

30 

40 

50 

2 

10 

20 

30 

40 

50 

2 

10 

:  20 

30 

40 

50 

9 

10 

20 

30 

40' 

SO 

9 

10 

ro 

30 

40 

50 

3 

10 

to 

30 

40 

60 

3 

10 

20 

30 

40 

50 

10 

10 

20 

30 

40 

so 

10 

10 

20 

30 

40 

50 

4- 

io 

20 

30 

40 

50 

4 

10 

20 

30 

40 

CO 

11 

10 

20 

30 

40 

so 

11 

-0 

20 

X 

40 

SO 

5 

10 

20 

30 

40 

SO 

5 

10 

20 

30 

40 

SO 

,  I 

Fig.  VII 


Of  course,  all  departments  numbered  above  six  are 
for  general  non-productive  labor  except  where  the  la- 
bor performed  pertains  to  tools,  patterns,  permanent 
equipment,  machinery,  assets  or  permanent  values. 

These  time  cards  should  be  marked  as  productive 
or  non-productive  by  the  foreman  of  the  department  in 
which  the  work  is  performed.     This  gives  the  time- 


CHAKLES   J.   WATTS  175 

keeper  the  information  necessary  to  separate  the  pro- 
ductive from  the  non-productive  labor  and  will  be  de- 
scribed and  illustrated  later. 

At  6:30  A.  M.  a  workman,  Wilson,  receives  his 
time  card  from  the  clerk  or  foreman  and  is  assigned  to 
his  work.  At  noon  he  has  finished  this  work  and  pro- 
ceeds to  fill  out  the  card.  He  first  inserts  his  check 
number,  in  order  that  the  timekeeper  may  identify  him 
on  the  pay  roll,  having  previously  checked  in  at  6:30 
A.  M.  with  this  number.  He  dates  his  card,  signs  his 
name,  indicates  what  he  has  done,  crosses  6:30  and 
11 :30  in  the  hourly  divisions  and  hands  the  card  to  the 
clerk  or  foreman  at  once. 

After  the  noon  hour  he  receives  a  new  card  and 
proceeds  as  before.  As  these  time  cards  will  be  coming 
to  the  timekeeper's  clerk  at  all  hours  of  the  day  from 
men  in  the  department,  the  clerk  at  once  inserts  the 
price  as  shown  by  the  price  card  (Figure  V),  and  com- 
putes the  earnings,  in  this  case,  $1.25. 

It  is,  of  course,  evident  that  the  labor  performed 
is  productive  and  the  card  is  marked  "Prod,"  meaning 
productive  labor.  Should,  however,  the  labor.be  such 
that  the  clerk  cannot  determine  whether  it  is  productive 
or  non-productive  he  confers  with  the  foreman.  This 
same  plan  is  pursued  during  the  day  and  at  the  close  of 
the  day  the  clerk  has  all  tickets  computed  except  the 
last  round  turned  in.  These  he  computes  as  his  first 
duty  the  next  morning. 


176  COST  OF  PRODUCTION 

The  clerk  hands  the  day's  time  cards  to  the  fore- 
man for  his  approval  or  correction  after  which  they 
are  delivered  to  the  timekeeper  for  the  pay  roll. 

As  all  these  cards  are  marked  so  as  to  separate  the 
productive  from  the  non-productive  labor  of  the  six 
manufacturing  departments,  the  timekeeper  is  now  in 
a  position  to  ascertain  each  day  or  week,  as  may  be 
desired,  the  departmental  as  well  as  the  general  non- 
productive percentage,  the  latter  being  a  fixed  quantity. 

In  computing  the  time  as  given  by  the  time  cards 
of  a  workman  in  any  producing  department,  where  the 
goods  are  run  through  in  small  lots,  it  is  recommended 
that  such  workman  receive  credit  on  his  ticket  for  the 
number  of  pieces  made  at  piece-rate  prices,  and  the  bal- 
ance necessary  to  make  up  his  day's  wages  be  allowed 
him  at  his  day  rate  and  be  charged  as  non-productive 
labor. 

For  calculating  the  departmental  percentages  of 
non-productive  labor  "labor  statement"  cards  are  pro- 
vided (Figure  VIII). 

The  timekeeper  having  full  information  from  the 
daily  time  cards  received  from  all  departments  is  able 
to  divide  the  pay  roll  as  shown.  The  total  of  the  pro- 
ductive labor  for  the  week  divided  into  the  total  of  non- 
productive labor  gives  the  per  cent  of  non-productive  la- 
bor for  the  week.  The  "last  week"  item  on  the  statement 
comes  from  a  previous  statement.  The  "to  date"  item 
includes  the  totals  from  the  beginning  of  the  fiscal  year. 
These  "to  date"  totals  represent  the  amount  paid  in  the 


CHARLES    J.    WATTS 


177 


wood  shop  up  to  and  including  September  twenty-sec- 
ond, resulting  in  an  average  departmental  non-produc- 
tive per  cent,  of  thirty-two. 

All  productive  or  manufacturing  departments  are 
treated  in  the  same  manner,  as  well  as  the  cost  of  that 
part  of  the  labor  in  the  non-productive  departments 
which  is  productive  labor  when  expended  on  tools,  pat- 
terns, permanent  equipment,  etc. 


WOOD  «MO* 

LABOft  ST 

•TtKIKT 

WtCU  (NOINO        7/^  %/a  o^ 

MHNMIN 

MM   MM      j 



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Fig.  Vllt 


The  method  of  obtaining  the  amount  of  general 
non-productive  labor  is  as  follows :  If  any  productive 
labor  has  been  performed  in  non-productive  depart- 
ments, that  amount  is  added  to  the  total  of  all  produc- 
tive departments.  The  sum  of  these  is  divided  into  the 
total  of  the  non-productive  departments  after  the 
amount  of  productive  labor  has  been  deducted. 

From  the  "labor  statements"  of  the  various  de- 
12 


178 


COST  OF  PRODUCTION 


partments  (Figure  VIII)  a  "labor  summary"  of  all  the 
departments  is  made  up  (Figure  IX). 

The  per  cent  of  general  non-productive  labor  for 
the  current  week  is  readily  determined  by  dividing 
the  amount  of  productive  labor  into  that  of  the  non- 
productive labor.  The  item  "last  week"  came  from  a 
similar  summary.  The  40  per  cent  non-productive  "to 
date,"  we  apply  to  the  total  amount  of  labor  as  shown 
on  the  card  (Figure  III). 


Fig.  IX 


The  method  of  ascertaining  and  recording  the  pro- 
portionate cost  of  both  the  departmental  and  the  gen- 
eral non-productive  labor  to  the  productive,  usually 
considered  a  difficult  undertaking,  is  by  this  system 
shown  to  be  an  easy  and  simple  computation.  The  pur- 
pose of  these  percentages  is  to  give  the  absolute  cost  of 
producing  each  part,  which  is  obtained  by  adding  them 
to  the  flat  cost  of  each  part  which  is  already  established 
since  the  work  is  done  on  a  piece-price  basis. 


CHARLES   J.    WATTS 


179 


For  convenience,  these  percentages  are  not  applied 
direct  to  each  part,  but  on  assembly  cards  (Figure  X) 
on  which  are  collected  the  flat  cost  of  each  part  as 
given  on  the  reverse  of  the  detail  cards  (Figure  I  re- 
verse) . 

For  illustration,  the  cost  of  labor  in  the  work- 
shop in  producing  of  the  part  designated  as  CI  is  as- 
sumed to  be  |2.35. 


/ 

WOOD  S"OP 

^V                           P»INTSHOP                         X V. 

... 

P'ICl 

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! 

Fig.  X 


This  amount  is  recorded  on  the  assembly  card  (Fig- 
ure X)  against  CI  and  by  the  same  method  is  charged 
up  the  flat  cost  of  all  other  parts  as  02,  03,  etc.,  until 
all  the  flat  labor  in  the  wood  shop  is  assembled, 
amounting  in  the  illustration  to  $16.95. 

It  is  presumed  that  on  September  twenty-third 
there  is  a  change  in  cost  (Figures  V  and  VI)  and  it  is 
so  recorded  on  the  assembly  card  (Figure  X).    There 


180  COST  OF  PRODUCTION 

being  no  further  changes,  this  total,  ($16.80)  as  the 
cost  of  the  flat  labor  in  the  wood  shop  is  transferred 
to  the  material  and  labor  summary  card  (Figure  III). 
After  this  total  is  also  added  the  departmental  per  cent 
of  non-productive  labor  for  the  wood  shop,  previously 
obtained  (Figure  VII). 

The  same  method  is  followed  with  the  cost  of  all 
the  flat  or  productive  labor  in  each  department  until 
the  total  cost  of  all  the  productive  labor  in  all  depart- 
ments is  obtained  together  with  the  non-productive 
percentage.  This  total  (Figure  III)  is  $93.65.  To  this 
total  is  added  the  percentage  of  the  general  non-pro- 
ductive labor  which  in  this  case  being  40  per  cent 
(Figure  II)  is  $37.46,  making  the  total  cost  of  labor — 
productive  and  non-productive — $131.11  (Figure  III). 

To  this  is  to  be  added  the  costs  of  material  taken 
from  the  material  summary  cards,  of  which  the  lumber 
card  (Figure  II)  is  shown.  This  gives  a  total  factory 
cost  in  this  case,  $228.60  for  100  8x20  rakes. 

As  total  factory  costs  are  needed  but  once  a  year, 
when  prices  are  made  for  traveling  salesmen,  the  total 
summaries  (Figure  III)  are  made  up  only  at  or  near 
the  close  of  the  factory  year. 

As  by  this  system  an  accurate  general  average  of 
the  cost  of  both  departmental  as  well  as  the  general 
non-productive  labor  is  determined,  and  as  most  manu- 
facturers make  yearly  contracts  for  materials,  it  is  pos- 
sible to  compute  the  cost  of  all  material  at  the  new 
prices  and  obtain  exact  costs  for  the  ensuing  season. 


CHARLES   J.    WATTS  181 

It  is  also  possible  at  any  time  during  a  season  to 
make  a  close  estimate  in  the  same  way  of  the  cost  of 
any  new  article  or  product  by  taking  the  cost  of  the 
material,  adding  the  known  cost  of  the  flat  labor  with 
the  "to  date"  labor  percentages  in  all  departments 
which  are  shown  by  the  labor  statements  at  that  time. 

The  term  "manufacturing  expense"  as  used  in 
this  chapter  includes  the  cost  of  the  supplies  used  by 
the  factory  during  the  year,  consisting  of 
ExpensetUrmg  replaced  belting,  emery  cloth,  sand  paper, 
planer  knives,  buckets,  brooms,  mops,  sta- 
tionery, fuel,  oil  and  numerous  other  articles  of  a  like 
nature.  There  are,  of  course,  many  ways  of  accounting 
for  these  items,  but  their  inclusion  in  this  division  ac- 
cords with  the  working  of  the  other  departments  and 
will  be  found  most  satisfactory. 

At  the  time  the  general  inventory  is  taken  let  all 
stock  of  this  class  be  carefully  listed  at  its  asset  value, 
deducting  a  certain  per  cent  for  depreciation  from  the 
value  of  such  articles  as  are  worn  or  partly  used.  Hav- 
ing done  this  there  is  now  in  the  factory  only  the  raw 
material,  permanent  equipment,  the  product  in  course 
of  manufacture,  and  the  finished  goods. 

At  the  time  of  commencing  operations,  whether  at 
the  beginning  of  a  new  business  or  annually  after  each 
inventory,  let  each  foreman  draw  from  the  stock  room 
such  supplies  as  he  needs,  a  proper  blank  being  pro- 
vided for  the  purpose.  It  is  necessary  to  advise  the 
stockkeeper  as  to  the  cost  of  each  article  in  this  ac- 


182  COST  OF  PRODUCTION 

count.  This  may  be  accomplished  by  a  system  in  the 
purchasing  department  whereby  invoices  for  all  goods 
received  pass  through  the  stock  clerk's  or  storekeeper's 
hands. 

Having  received  and  filled  the  order  from  the  fore- 
man, the  material  drawn  is  charged  to  the  proper  de- 
partment on  a  stock  card  (Figure  XI).  Let  this  card 
represent  one  article  which  in  the  illustration  shows 
leather  belting  drawn  for  department  Number  One. 

Have  a  card  for  each  article,  also  a  card  for  each 
department.  As  the  usual  list  of  supplies  is  not  large 
it  will  not  take  very  many  cards  for  all  of  the  depart- 
ments. The  stockkeeper  should  do  all  his  posting  from 
the  foreman's  orders  to  these  cards  once  a  day,  and  thus 
economize  time. 

This  stock  card  shows  the  cost  price  and  it  is  there- 
fore not  a  difficult  matter  to  enter  the  record  in  actual 
value  of  the  supplies  and  not  simply  the  quantities 
used.  There  are  many  ways  in  which  the  ledger  can 
be  divided,  but  it  is  recommended  that  there  be  used  a 
card  having  a  guide  projection  in  the  center  and  extend- 
ing one- third  of  its  length,  for  the  division  of  the  dif- 
ferent kinds  of  stock,  and  a  card  with  a  tab  (Figure 
NI)  for  each  department. 

As  these  tabs  indicate  the  numbers  of  the  depart- 
ment it  is  easy  for  the  stockkeeper  to  locate  any  cards 
wanted  when  posting. 

The  system,  once  started,  requires  but  little  labor 
to  keep  up,  and  as  a  replacement  is  infrequent,  the  ex- 


CHARLES   J.   WATTS 


183 


pense  is  small.  If  desired,  the  capacity  of  the  cabinet 
may  be  enlarged  and  used  also  to  keep  a  record  of  all 
material  in  the  stock  room,  although  for  cost  purposes 
it  is  not  necessary. 

The  superintendent  and  the  manager  as  well,  will 
also  find  that  a  weekly  report  or  manufacturing  ex- 
pense summary  (Figure  XII),  made  up  from  the  stock 
cards  (Figure  XI),  is  very  helpful  in  eliminating  un- 


'^S/Os/mV  "A 

ay0 

IHTI 

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««..T,T. 

mm 

'«.' 

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MMOTf 

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ft 

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Fig.  XI 


necessary  expense  in  any  department.  This  report, 
either  on  a  card  or  on  a  sheet,  may  accompany  the  re- 
ports of  labor  in  the  various  departments  (Figure 
VIII).  These  two  reports  show  the  actual  cost  of  the 
labor  performed  and  of  the  supplies  consumed  for  the 
week,  which  may  be  discussed  and  analyzed  with  the 
foremen. 

This  weekly  report  of  manufacturing  expense  also 


184 


COST  OF  PRODUCTION 


serves  as  a  basis  for  applying  this  expense  to  labor 
cost,  either  at  the  end  of  the  season,  or  at  any  time 
during  the  season,  when  the  factory  costs  of  making 
any  new  articles  of  manufacture  are  under  considera- 
tion. 

In  pro-rating  this  expense  over  the  cost  of  the  given 
article,  it  is  recommended  that  the  entire  output  of  the 
factory  be  computed  at  prices  derived  from  the  cost 
estimates,  and  that  this  amount  be  divided  into  the 


MANUFACTURING    EXPENSE    SUMMARY 

wccuckoino             (9e^C.     Zi'bo. 

■      «.Tf.,.l 

1 

2 

3 

4 

5 

6 

-     7 

e 

9 

to 

H 

> 

q 

<,r 

£*£ 

> 

Ao 

. 

To 

I 

&U, 

&jU 

fgfe. 

jLfiiiftitf 

(i 

'it 

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fS 

.}*    A  of* 

Pig.  XII 

total  cost  of  the  supplies  used.  This  gives  the  per  cent 
which  is  added  to  the  labor  and  material  cost  of  the 
individual  article  to  secure  the  net  factory  cost. 

Of  course,  this  per  cent  during  the  season  could 
not  be  readily  arrived  at  owing  to  the  unfilled  orders 
in  the  factory,  but  the  total  cost  of  supplies  for  years 
previous  is  known,  and  a  per  cent  based  upon  this 
would  answer  for  the  special  costs  necessary  to  be  esti- 
mated during  the  season. 


CHARLES   J.   WATTS  185 

If,  in  calculating  costs  at  the  end  of  a  season  for 
the  succeeding  season,  it  should  be  found  that  the  pro- 
portion of  supplies  used  is  10  per  cent  of  the  entire 
cost  of  the  product,  and  the  article  in  question  costs 
|10.00,  the  manufacturing  expense  would,  of  course,  be 
$1.00  for  each  article,  which  would  be  added  to  the 
factory  cost. 

General  Expense,  in  connection  with  a  cost  system, 
is  to  many  managers  a  source  of  annoyance,  and  how 
to  ascertain  the  proper  percentage  to  be 
Expense  applied  to  the  factory  cost  is  a  problem 

which  is  ever  before  them.  Again,  how  to 
apply  the  anticipated  profits  has  been  a  much  discussed 
question  with  all.  While  it  is  not  claimed  that  this 
method  of  treating  general  expense  will  satisfy  every 
manufacturer,  yet  he  will  be  convinced  that  if  he  will 
apply  the  items  that  go  to  make  up  general  expense  as 
here  indicated,  the  estimated  cost  will  vary  but  little, 
if  any,  from  the  actual  costs. 

The  term,  general  expense,  as  here  used  includes 
such  items  as  salaries,  traveling  expenses,  taxes,  in- 
surance, uncollectable  debts  and  notes,  depreciation  of 
product  as  well  as  of  manufacturing  plant,  freights, 
telephone  rent  and  telegrams,  express  charges,  adver- 
tising and  similar  items  of  a  miscellaneous  nature. 

There  are  two  ways  in  which  general  expense  can 
be  arrived  at  for  cost  purposes.  Either  is  sufficiently 
accurate  to  obtain  satisfactory  results,  one  having  the 


186  COST  OF  PRODUCTION 

advantage  of  being  short  in  application  while  the  other 
is  somewhat  more  difficult  and  tedious. 

The  simplest  method  is  to  keep  a  close  account  of 
all  items  entering  into  the  general  expense  account  as 
direct  charges,  and  ascertain  the  total  of  this  account 
for  the  year,  adding  a  suitable  allowance  for  uncol- 
lectable  accounts,  depreciation  of  product,  plant,  etc. 

Divide  this  total  by  the  total  cost  of  the  entire  out- 
put less  the  value  of  material  on  hand  as  shown  by  the 
inventory.  This  result  will  be  the  per  cent  which  is  to 
be  added  to  the  cost  estimate. 

It  is  suggested  that  the  salaries  of  traveling  men 
and  their  expenses  be  kept  separate  and  by  districts  or 
territories.  This  will  make  it  possible  to  ascertain  the 
cost  per  cent  of  selling  in  each  district. 

This  separation  is  recommended,  as  many  manu- 
facturers well  know  that  their  selling  expense  in  one 
territory  is  much  greater  than  it  is  in  others.  This  con- 
dition alone  often  prevents  a  concern  from  doing  a 
profitable  business  in  certain  localities,  which  disad- 
vantage would  be  removed  by  making  each  locality 
stand  its  own  share  of  the  selling  expense,  instead  of 
pro-rating  the  entire  selling  expense  over  the  entire 
product. 

In  the  handling  of  a  certain  product  one  territory 
is  known  in  which  it  costs  40  per  cent  of  the  selling 
price  to  market  the  goods,  whereas  in  others  it  requires 
only  from  3  to  5  per  cent.  If  a  district  selling  expense 
account  is  kept  an  expensive  territory  can  be  quickly 


CHARLES   J.   WATTS  187 

located  and  abandoned,  if  the  resulting  profit  is  not 
worth  the  time  and  expense  required  to  secure  the  busi- 
ness. If  the  selling  expense  account  is  not  divided  in 
this  manner,  these  facts  are  lost  sight  of.  It  can  be 
done  either  by  the  ledger  accounts  or  by  a  simple  ruled 
distribution  book  or  card  file  which  the  bookkeeper  can 
keep  without  difficulty.  If  the  latter  is  used,  there  is 
a  card  for  traveling  expense,  for  salary,  and  for  any 
other  incidental  expense  of  the  salesman  in  each  dis- 
trict. 

On  the  reverse  side  may  be  kept  a  daily,  weekly  or 
monthly  record  of  the  sales.  At  the  end  of  the  year  a 
few  simple  computations  only  are  necessary  to  arrive 
at  the  desired  results. 

The  other  plan  of  ascertaining  the  per  cent  of  gen- 
eral expense  to  be  added  to  the  cost  estimates,  of  which 
mention  was  made,  would  be  carried  out  in  the  main  in 
the  manner  just  described,  except  that  instead  of  wait- 
ing until  the  end  of  the  season  to  apportion  the  monthly 
fixed  expense,  reserve  and  suspense  accounts  are  opened 
in  the  ledger  to  cover  such  items  of  expense  as  are  not 
directly  incurred  during  the  month  in  review. 

In  reserve  accounts  are  included  such  expenses  as 
cannot  yet  be  exactly  determined  and  whose  payment 
therefore,  must  be  deferred ;  for  illustration,  taxes.  To 
this  tax  reserve  account  would  be  credited  the  esti- 
mated amount  of  the  yearly  tax,  the  same  amount  being 
charged  to  an  Accruing  Tax  account.  This  amount 
would  be  pro-rated  monthly  into  the  general  expense 


188  COST  OF  PRODUCTION 

account  and  the  pro-rated  sums  credited  to  Accruing 
Taxes.  At  the  end  of  the  year,  if  the  estimate  was  cor- 
rect, the  cash  payment  should  close  the  Tax  Reserve 
account  and  the  pro-rated  sums  which  have  been  cred- 
ited monthly  would  close  the  Accruing  Tax  account. 
Other  reserve  accounts  are  handled  in  the  same  way. 

Suspense  accounts,  which  comprehend  expense  paid 
in  advance  for  terms  longer  than  a  single  month,  are 
handled  in  the  same  manner  except  that  the  suspense 
account  would  be  charged  with  the  money  paid  and  the 
amount  pro-rated  to  general  expense  according  to  the 
number  of  months  covered  by  the  payments.  For  in- 
stance, if  insurance  premiums  are  paid  six  months  in 
advance,  one-sixth  would  be  charged  out  each  month  so 
that  at  the  end  of  six  months  general  expense  would 
have  consumed  all  of  this  amount  and  the  Advance 
Insurance  Premium  account  to  which  is  charged  the 
cash  payment,  would  be  closed.  Salesmen's  expenses 
and  other  similar  items  are  handled  in  the  same 
manner. 

The  difference  in  the  two  methods  is  the  difference 
between  general  expense  known  only  at  the  end  of  the 
year  and  a  definite  statement  of  all  general  expense 
items  for  each  month.  The  first  is  simple,  and  for 
yearly  cost  purposes  is  generally  satisfactory,  while  the 
second  method  is  equally  good  for  yearly  costs  but  also 
gives  a  monthly  general  expense  statement,  which  for 
many  reasons  is  preferable. 


CHARLES   J.    WATTS  189 

Either  method  can  be  used  with  a  card  system, 
thus  reducing  the  cost  of  maintenance,  or  can  be  kept 
in  the  ordinary  ledger. 

Special  Costs  is  a  term  used  to  include  the  extra 
items  of  cost  arising  from  defective  manufacture,  the 
substitution  of  expensive  material,  such  as 
Costs*1  brass  in  place  of  malleable  iron,  and  such 

items  as  may  result  from  oversight  on  the 
part  of  some  foreman  or  other  employe',  or  from  a  fail- 
ure of  prompt  delivery  of  material.  If  these  expenses 
cannot  be  traced  directly  to  some  source  against  which 
they  may  be  charged,  they  should  be  borne  by  the 
specific  part  of  the  product  affected  and  not  charged 
over  the  entire  product  or  to  the  general  expense 
account. 

It  is  suggested  that  a  Special  Cost  account  be 
opened  in  the  ledger,  covering  such  items  and  that  this 
account  carry  this  expense  throughout  the  season,  re- 
garding it  is  an  uncollectible  account  which  is  to  be 
pro-rated  over  the  cost  of  the  product  affected. 

The  natural  inquiry  is,  "Why  should  this  expense, 
incurred  during  the  previous  year,  be  added  to  the  cost 
of  the  goods  to  be  made  the  following  season?"  The 
reason  is,  if  a  certain  amount  is  charged  up  during  one 
season  for  oversight  and  errors,  there  is  a  strong  proba- 
bility that  similar  conditions  will  continue  to  exist, 
and  an  allowance  should  be  made,  as  it  would  be  for 
bad  debts,  interest  on  the  investment,  etc.    This  sepa- 


190  COST  OF  PRODUCTION 

rate  account  gives  facts  to  work  on,  while  if  the  items 
were  merged  in  the  general  material  accounts  they 
would  be  lost  sight  of  entirely. 

To  the  cost  estimates  with  all  percentages  included 
must  now  be  added  a  certain  per  cent  for  profit.  For 
example,  assume  twenty  per  cent  as  the 
Profits  desired  profit,  and  f  10.00  as  the  cost  of 

producing  an  article  in  the  factory,  ten 
per  cent  as  the  per  cent  of  manufacturing  expense, 
fifteen  per  cent  as  the  per  cent  of  general  expense, 
and  five  per  cent  as  the  per  cent  of  selling  cost,  then 
113.00  is  the  total  cost  of  the  article.  If  twenty  per 
cent  be  added  to  this  the  selling  price  is  f  15.60  in  the 
territory  costing  five  per  cent  to  sell  in.  This  will 
assure  you  a  profit  of  about  twenty  per  cent  on  the 
money  invested  for  the  machine. 

Now,  let  us  consider  the  different  cards  and  blanks 
and  see  how  each  may  be  elaborated  to  make  a  broader, 
but  perhaps  more  complicated  system. 

The  detail  card  (Figure  I  reverse)  may  be  changed 
so  as  to  provide  a  column  for  recording  the  price  as 
well  as  the  quantity  of  the  stock  with  one  or  two  ad- 
ditional columns  for  changes  in  price.  This  card  then 
becomes  a  working  price  sheet,  and  when  the  non-pro- 
ductive labor  percentages  are  added  to  these  prices  a 
cost  record  of  pieces  or  parts  is  attained  which  fur- 
nishes a  cost  basis  for  prices  of  repair  parts  as  well  as 
for  the  inventory.  As  these  cards  are  kept  up  they 
furnish  a  permanent  corrected  record  of  cost  prices  for 


CHARLES   J.    WATTS  191 

these   purposes   at    any   time   they   may   be    desired. 

In  making  these  computations  for  inventory  pur- 
poses it  is  not  recommended  that  the  percentages  for 
manufacturing  and  general  expense  be  added.  Annual 
inventory  prices  should  not  be  inflated,  and  for  this 
reason  factory  cost  prices  only  should  be  used. 

There  is  always  a  certain  amount  of  stock  taken 
into  the  inventory  which  is  valued  at  the  original  cost 
while  it  has  really  depreciated.  Taking  the  inventory 
at  corrected  cost  prices  will  therefore  in  a  measure, 
correct  these  errors. 

The  material  summary  card  (Figure  II)  shows  in 
this  instance  the  total  cost  of  lumber  used  in  the  8  x  20 
rake.  From  these  material  summary  cards  a  compu- 
tation may  be  made,  showing  the  approximate  number 
of  feet  of  lumber  required  for  each  size  and  kind  of 
machine  made,  thereby  giving  the  required  unit  neces- 
sary for  a  given  number  of  machines  of  each  class.  Fur- 
ther computations  may  be  added,  giving  the  total  costs 
as  shown  by  the  cards.  These  furnish  valuable  data  in 
estimating  the  requirements  for  the  next  season. 

Further,  if  the  cost  of  the  labor  on  each  kind  of 
article  as  shown  on  the  total  summary  cards  (Figure 
III)  is  summarized,  a  very  close  estimate  will  be  at- 
tained of  the  amount  of  money  required  for  next  sea- 
son's labor. 

These  cards  (Figure  III)  may  be  so  modified  that 
manufacturing  and  general  expense  are  included  with 
the  factory  costs.     If  this  is  done  nothing  need  be 


102  COST  OF  PRODUCTION 

added  to  make  the  record  complete  but  the  selling  price 
and  the  profit  wanted.  A  column  may  be  added  in 
which  to  show  the  total  feet  of  lumber,  or  the  weight  of 
the  material. 

By  completing  the  records  in  this  way,  it  is  easy 
to  make  comparative  yearly  statements  of  the  cost  of 
material  and  labor  and  the  percentages  of  expense  and 
profit. 

When  the  information  on  the  cupola  record  (Fig- 
ure IV)  is  complete  there  is  still  ample  space  for  other 
information  for  the  superintendent.  For  example,  if  it 
is  desired  to  know  the  average  cost  of  molding,  add  to 
the  total  productive  labor  in  the  foundry,  the  total  non- 
productive per  cent  which  in  this  case  is  (40) ;  divide 
this  amount  by  the  total  number  of  pounds  of  good 
castings  and  the  result  is  the  average  cost  per  pound  to 
mold  for  two  weeks,  the  period  of  time  covered  by  the 
card.  This  added  to  the  cost  of  the  melted  iron  gives 
the  average  cost  per  pound  for  castings. 

The  piece-price  card  (Figure  V)  may  be  ruled  on 
the  back  in  such  a  manner  as  to  provide  space  for  a 
record  of  orders  received  and  parts  made,  taking  the 
place  of  a  department  order  book.  This  is  particularly 
advantageous  for  the  foundry  and  steel  shops. 

If  the  cards  (Figure  V)  are  of  good  material  the 
items  may  be  recorded  in  pencil,  and  at  the  end  of  the 
season  this  record  may  be  erased  and  the  cards  used 
again. 

While  the  time  card  (Figure  VII)  is  intended  for 


CHARLES   J.   WATTS 


193 


the  guidance  of  the  timekeeper  in  making  up  the  pay 
roll,  it  may  be  passed  to  the  cost  department  and  the 
labor  recorded  thereon  entered  on  a  piece-work  record 
card  (Figure  XIII).  This  card  shows  the  number  of 
each  piece  made,  at  what  time,  by  whom,  the  number 
of  hours  necessary  in  making,  the  total  amount  paid 
and  the  average  rate  per  hour  earned  by  each  work- 
man. 


P1CCC  WORK  RCCOftO 

G9cuu*l~t^j     C>jx£ 

-« 

NO     -.0. 

«.T« 

TOT.C 

VL"*i 

HO... 

D»  «»• 

•o..-.~            m 

'A, 

/oo 

/%-r 

■*.*■ 

iT 

.4o 

.    J?art^<?~.    •   'H 

«U 

^ 

J-o 

,*>£ 

* 

&              IE 

m 

*"  H 

Fig.  XII L 


This  is  useful  information  and  is  well  worth  the 
time  and  effort  necessary  to  keep  it  in  proper  order, 
as  it  indicates  whether  the  scale  of  piece  prices  paid  is 
profitable  or  whether  it  should  be  revised.  Then,  too, 
the  same  cards  may  be  used  as  a  basis  for  opening  a 
ledger  account  with  each  lot  of  goods  going  through  the 
factory.  To  each  account  is  charged  all  the  labor  and 
the  material  consumed  in  the  process  of  manufacture 
13 


194  COST  OF  PRODUCTION 

and  the  cost  of  the  yearly  production  of  any  particular 
lot  is  shown,  no  matter  when  it  was  made. 

By  using  order  numbers  in  the  factory  for  each  lot 
of  goods  going  through  at  one  time,  practically  the  same 
form  of  cards  could  be  used  by  simply  adding  a  place 
for  the  order  number  and  charging  the  cost  of  labor 
to  that  number  as  well  as  the  cost  of  all  material  drawn 
on  requisitions  correspondingly  numbered.  By  this 
method  the  exact  cost  of  the  lot  is  obtained. 

This,  however,  is  bringing  the  system  nearer  and 
nearer  to  a  balance  ledger  cost  system  and  therefore 
becomes  more  expensive  and  complicated. 

The  labor  statement  cards  (VIII)  may  be  pro- 
vided with  columns  other  than  those  shown  in  the  illus- 
tration, in  which  the  manufacturing  expense  may  be 
recorded,  as  on  the  manufacturing  expense  summary 
cards  (Figure  XII). 

This  places  before  the  foreman  of  the  department 
the  exact  expense  incurred  by  his  department  during 
the  week,  from  which  report  he  may  intelligently  dis- 
cuss with  the  superintendent  the  conditions  in  the  fac- 
tory, particularly  in  his  own  department. 

Through  these  statements  unnecessary  items  of  ex- 
pense are  often  discovered  which  can  be  eliminated, 
thus  adding  to  the  net  profit. 

Again,  a  column  may  be  added  in  which  the  time- 
keeper may  compute  the  per  cent  of  piece  work  to  day 
work,  another  column  to  show  the  number  of  men  em- 
ployed in  the  department  and  the  average  wage  rate 


CHARLES    J.    WATTS  195 

paid  per  hour.  A  total  summary  of  all  this  information 
may  be  made  on  the  labor  summary  cards  (  Figure  IX) 
covering  all  departments. 

To  this  system  for  ascertaining  factory  costs  may 
be  added  a  system  of  inventories  on  cards  which  will 
show  the  number  of  pieces  made  and  in  stock,  and  their 
location  in  the  stock  or  store  room.  The  procedure  in 
general  is  as  follows: 

When  a  lot  or  run  of  parts  or  pieces  is  started 
through  the  factory,  it  should  be  accompanied  through 
all  the  various  departments  by  a  tag-board  slip  indi- 
cating the  department  which  it  is  to  reach  finally,  the 
number  of  pieces  sent,  the  piece  name  or  number,  and 
any  other  information  that  may  be  necessary.  This  card 
should  accompany  the  lot  until  it  is  put  in  stock  or 
storage. 

The  assembly  room  should  draw  on  this  stock  by 
requisition  only.  Then  a  record  of  finished  parts  in 
stock  is  easily  maintained  and  the  requisitions  them- 
selves show  the  quantities  in  the  assembly  room  being 
placed  in  finished  product. 

The  finished  goods  sent  to  the  warehouse  from  the 
assembly  room  should  be  accompanied  by  transfer  slips 
showing  the  exact  number  sent.  The  clerk  in  charge  of 
the  inventory  cards,  having  received  properly  signed 
requisitions  for  the  finished  parts,  makes  the  necessary 
changes  on  the  records. 

Such  a  system  provides  a  simple  record  of  all  parts 
made  and   on   hand,  and  if  shipments  are  checked 


196 


COST  OF  PRODUCTION 


against  the  goods  in  the  warehouse  a  complete  inventory 
results.  Further,  by  using  the  record  of  costs  as  shown 
by  the  detail  cards  (Figure  I)  an  accurate  inventory 
with  values  can  be  compiled  at  any  time. 


INDEX 


Page 
Accessory    material,    Definition 


of 


Accounting,    Depreciative 80 

Adjustment   values 81 

Advertising  as  related  to  good 

will  107 

Amortization,    Definition    of....  75 
Apparent  profit  shown  by  gen- 
eral    factory     buying     from 

branch    36 

Appreciation    87 

Ascertaining  the   Cost  of  Pro- 
duction   140 

Babbage,  Charles,  An  early  au- 
thority on  costs 9 

Blanket       depreciation,       Sim- 
plicity   of 91 

Bonus  system,   The 54 

Brace  method  of  graphic  repre- 
sentation     25 

Burden    58 

Correct  apportionment  of  59 
Definition    of 15-19 

Causes   contributory    to    depre- 
ciation     82 

Charges,    transportation,    How 

distributed    33 

Charles,    Norton    W.,    A    cost 

system    by 150 

Check  system,  The 44 

Church,    A.    Hamilton,    Quota- 
tion   from 102 

Classification    for    the    purpose 

of    depreciation 91 

Commodity,  finished,  Definition 

of  31 

Constituent  elements  of  cost..  15 
Contingencies,  Non-insurable.. .  86 
Cost    accounting,    Use    of    the 

term  22 

Constituent  elements  of..  15 
determining,    Meaning    of 

the  term 23 

Meaning  of  term 27 

of  Production,   The 161 

of   Wood   Working,   The.. 131 
recording,  Meaning  of  the 

term    23 

System,  A  Factory 119 

Installation  of  a.  12 

Need  of  a 2 

Utility  of  a 1 

to  make  and  sell,   Defini- 
tion  of 27 

Cost-keeping  system,  Value  of  a    5 

Costs  and    labor 6 

Exact,  not  determinable.  14 


Costs  and  labor—  Continued.  Page 
Knowledge  of  in  business  21 
Known,     as     applied     to 

printing    4 

Growth  of  the  science  of  11 
How     related     to     book- 
keeping     21 

How  related  to  buying..  23 
How  related  to  selling. . .  23 
Science  of,  factors  affect- 
ing        9 

Day 's- work  plan,  The 47 

Depreciation  and  reserve  fund.  87 
and  factory  build- 
ings      76 

Annual       percent- 
age   of 93 

based  upon  valua- 
tion    88 

Blanket,     simplic- 
ity   of... 91 

Causes      contribu- 
tory to  82 

How     figured     to 
meet   fluctuating 

demand    85 

of    machinery 93 

Method    of   calcu- 
lating     87 

Methods   of 77 

studied      by      in- 
surers     76 

upkeep,     and     re- 
lated  factors 75 

Development  of  the  science  of 

costs    7 

Diffused  labor,  Definition  of....  18 
Direct  expense  not  governed  by 

rule    108 

labor,  Definition  of 17 

Diverted   stores 39 

Drawings     and     patterns,     De- 
preciation   of 96 

Elements,  Minor  burden 72 

of    the     science     of 

costs    14 

Ely,  L.  A.,  A  cost  system  by..  125 

Employe"  record  and  rating 42 

Securing  the  interest  of  56 
Employment,  Permanency  of . . .  84 
Engines   and   boilers,   Deprecia- 
tion  of 96 

Engineering,    How    related    to 

costs   20 

Estimates,  To  what  chargeable.. 105 
Expense,  Direct,    not    governed 

by   rule 108 

Indirect  108 


197 


198 


INDEX 


Expense— Continued.                 Page 
Traveling  108 

Factors  of  selling  expense 104 

Factory  cost,  Elements  compos- 
ing     18-28 

Relation      of,      to 
Selling  expense.. 100 

organization   19 

Final  Cost,  Meaning  of  term...  27 
Finished  commodity,  Definition 

of    31 

Fluctuation    in    the    price    of 

material   35 

Fund,  Depreciation  and  reserve  87 

Graphic    table   of   cost   factors 

and    elements 26 

Growth  of  plant,  Provisions  for  97 

Halsey,  F.   A.,   Interest  not  to 

be  included  in  burden Ill 

Hathaway,    E.    J.,   A   cost  sys- 
tem   by 140 

Holding    85 

Hourly-burden  plan,  The 61 

How  Factory  Costs  are  found.  150 

Incidence,   Percentage   of,   used 
in  distribution  of  selling  cost.103 

Indirect   expense 108 

labor,  Calculation  of..  69 

Known     costs    as    applied    to 
printing    4 

Labor    41 

Calculation  of  indirect..  69 
Land  or  site,  Depreciation  of..  92 

Machine-rate  plan,  The 63 

Machine-rate   plan,    The    scien- 
tific      64 

Machines,    New,    called   for    to 

improve    product 86 

Material,  accessory,     Definition 

of   32 

Definition    of 15-30 

value  of 32 

Fluctuation     in     the 

price    of 35 

Raw,  Definition  of...  30 
Methods  and  Inventions,  New..  85 
Minor  burden  elements 72 

"Non-productive,"    Use    of   the 
term    67 

Percentage-burden  plan,  The...  60 

Periodic  valuation 81 

Piece    work,    Differential    rate 

system   of 52 

Piece-work   plan 48 

Premium  plan,  The 53 

Price,   Relation  of  to  labor 41 

Printing  and  costs 2 


Page 
Product,  Manufacture  and  dis- 
posal   of 34 

Profit  110 

Definition    of 27-111 

Elements      comprehended 

by  110 

included    in    the    interest 

group   of  elements 113 

sharing  plan.  The 55 

the  final  factor  of  cost...  17 

Raw  material,  Definition  of 30 

Regarding  Factory  Costs 125 

Rent,  A  part   of  Profit 73 

Requisition  for  stores 37 

Revaluation   not   practical 80 

Revell,    Alexander    H.,    Advice 
on  costs 13 

Science  of  costs,  Elements  of  the  14 
Meaning  of  the 

term    23 

Scientific     machine-rate     plan, 

The   64 

Scrap,  How  disposed  of 40 

Selling  Expense,  Introduction  of  15 
no  part  of  pro- 
duction  cost.  98 
Relation   of.   to 

Factory  cost.  100 
Not   a    part    of 

Burden    OS 

price,   Constituents  of..  26 
The  factors  com- 
posing it 25 

Site,   Appreciation   of 8S 

Stores,    Diverted 39 

requisition    37 

Supervision   of 34 

System,  Cost-keeping,  Value  of 

a    5 

Supervision  of  stores 34 

Tally  system,   The 44 

Tenure  or  holding 83 

Time,     probable,     Methods     of 

figuring  51 

Transportation    charges,     How 

distributed  33 

Traveling   expense 107 

Trust,  the  influence  of  on  pro- 
duction cost 8 

Upkeep,    Relation    of    to    divi- 
dends   78 

Utility  of  a  cost  system 1 

Valuation,    Depreciation    based 

upon    88 

Periodic    81 

Values,   Adjustment 81 

Wage    plans 46 

Warren,   Edric  C,  A  cost  sys- 
tem by 119 

Watts,  Charles  J.,  A  cost  sys- 
tem by 161 


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DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


flPB  30  rcstt 


NOV    2>96Sfi4 


REC'D 


JUN  191935 


3CT>1'65-7PM 


LOAN  DEFT. 


MAR    1    1938 


NOV  2  8  196569 


REC'O  LD 


Off 


*oja*l 


-kf,  ID 


MAY  7 -1956 


;  •  '  , 


_b_^ 


tHTER-LfBRARY 
CDAT1 


Hfftt 


ms 


OCT  7    Wl 


NOV  03  1995 


APR    S 19B2 


LD21-100>«-7,'33 


vJU 


YC  39223 


U.C.BERKELEY  LIBRARIES 


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